LAST UPDATE | 12 Sep 2024

THE EUROPEAN CENTRAL Bank has lowered its key interest rate by a quarter point, the second such cut this year as inflation steadily heads towards the two-percent target.

The latest reduction in borrowing costs brings the closely watched bank deposit rate down to 3.5%. The ECB lowered its main refinancing and marginal lending rates by 60 basis points each, as part of a previously announced technical adjustment.

The ECB, which sets monetary policy for all 20 countries that use the euro currency, had raised rates at a record pace from the middle of 2022 in a bid to tackle surging consumer prices but finally lowered them slightly again in June.

Until today, the key deposit rate currently had stood at 3.75%, down from a record high of 4%. The ECB’s governing council is now expected to make another 0.25% cut today.

In August, inflation fell to its lowest level in more than three years. It had peaked at 10.6% in October 2022 in the wake of Russia’s invasion of Ukraine on top of supply chain issues coming out of the Covid-19 pandemic.

However, economic performance in some parts of the Eurozone have been less positive recently than expected, such as Germany, where the economy shrank unexpectedly in the second quarter of the year.

“Recent inflation data have come in broadly as expected,” said the ECB in a statement.

But it warned the path ahead would be bumpy, saying that “inflation is expected to rise again in the latter part of this year,  partly because previous sharp falls in energy prices will drop out of the annual rates.”

The ECB also cited continued pressure from fast-rising wages although it said that labour cost pressures were easing.

The central bank for the 20 countries that use the euro left its inflation forecasts unchanged from its last projections in June, forecasting the figure would drop below two percent in 2026.

However, it slightly lowered its growth outlook, predicting the eurozone would expand 0.8% this year down from a previous projection of 0.9 percent.

But, as expected, the ECB statement gave no guidance on its next moves – in line with its recent policy that it will not foreshadow future decisions.

It repeated language from previous statements that it would “keep policy rates sufficiently restrictive for as long as necessary to” bring inflation to two percent, following a “data-dependent and meeting-by-meeting approach”.

Mortgages 

Most fixed rate mortgage holders, as well as those on variable rate mortgages, are unlikely to see any benefit from today’s rate cut, said Trevor Grant, chairperson of Irish Mortgage Advisors.

“It must be remembered too that Irish home-loan variable and fixed mortgage rates are highly unlikely to fall to the same extent as ECB rates.  This is because home loan rates have not increased at the same levels as the ECB rate had between July 2022 and September 2023, and because banks are under pressure to increase returns for their savers,” Grant said.

“Furthermore, those seeking mortgages today face much higher interest rates than would have been the case if they took their mortgage out before ECB rates started to go up in July 2022.

“In addition, tens of thousands of borrowers will see their fixed rates expire this year and many of these will be faced with a significant increase in their monthly mortgage repayments as their pre-2022 ultra-low fixed-rate mortgage deal expires.”

Darragh Cassidy of Bonker.ie. said today’s rate cut was “pretty much expected” and that the ECB is likely to reduce rates “at least one more time before the end of the year as inflation continues to ease. Probably in December”. 

“Tracker customers will benefit almost immediately from the cut. For someone with €200,000 remaining on their mortgage over 10 or 15 years, they’ll save around another €25 a month on their repayments.

“And of course they’ll also benefit from a further technical cut of 0.35 percentage points later in the month as the ECB has flagged that it’s reducing the difference between its main refinancing rate, off which trackers are priced, and its deposit rate by this amount.

“Today’s move will also put further downward pressure on variable and fixed rates. We may not see any reductions immediately. But we’re almost guaranteed to see some rate cuts from the main banks here over the coming weeks.

“But there are also losers to falling interest rates. Savers are likely to start seeing their rates fall. And annuity rates will fall making it harder to fund for your retirement in some cases.”

Martina Hennessy, CEO of Doddl.ie, has said that the “vast majority of mortgage holders in Ireland do not have a tracker rate but will also hope that the ECB reducing rates will result in Irish mortgage lenders following suit”.

“Prior to the ECB drop in June, the main banks in Ireland had already decreased rates by up to 1% in May,” Hennessy said.

“Ordinarily, variable rates—and deposit rates—should move in tandem with ECB base rate changes. However, fixed-rate mortgages are influenced by other factors, including the Euro Interbank Offered Rate (EURIBOR), deposits, operating costs, and competition. Currently, interest rates in the Irish market vary widely, ranging from 3.45% to as high as 6.9%,” she said.

“While we may see some lenders at the higher end of the market reduce their rates, and pillar banks making adjustments to remain competitive, it’s unlikely that rates will return to the low sub-2% levels seen just over two years ago.”

Additional reporting by AFP