Statements by senior central banks need to be interpreted with care. But it is noteworthy that European Central Bank chief economist Philip Lane has warned that inflation could fall below the 2 per cent target level if interest rates do not fall quickly enough. While he also cautioned about reducing borrowing costs too quickly, it is clear that the only way for interest rates to go in the short term is downwards.
The ECB has already moved, reducing interest rates by four times since summer – a cumulative reduction of one percentage point. This was the correct course – arguably the reductions could have been a bit more significant. The key deposit rate, still at 3 per cent, means interest rates are still at a level which restricts economic activity.
With inflation falling and economic growth weak across most of the single currency area, further cuts are justified. For consumers, the overall message is the important one. Prepare for lower interest rates.
This is, of course, good news for borrowers. Those on tracker mortgages will benefit – a further illustration of how ridiculous it was to pick this group out in the budget for mortgage interest relief. New borrowers and those whose current fixed rate term is due to end also stand to benefit.
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On the flip side of the equation, savers need to prepare for lower returns, as well. While interest rates have gone up over the past couple of years, the real value of savings was eroded by the surge in inflation. Savers can only hope that the balance in the next few years will at least protect the real value of what they have in the bank.
A likely divergence in interest rates between Europe and the US is also on the cards, with the US economy performing more strongly.
Lower interest rates have some unwelcome consequences for an economy like Ireland, which is already close to full capacity and, unlike the rest of the euro zone, has been growing strongly. It does not need further stimulation. In particular, further rate cuts risk adding fuel to demand in an already-inflated housing market , where what is required is lower prices, not higher ones.