Markets bet ECB could cut interest rates as early as March
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As many as 70,000 households whose current fixed mortgage rates expire into 2024 will likely face much lower-than-anticipated hikes in their interest bills, as wholesale market funding rates continued to tumble on Thursday, amid expectations the European Central Bank (ECB) could be forced to cut official rates as early as March.
Financial markets now bet the ECB will in all likelihood start cutting in April, and they see an almost 50% chance of a reduction as early as March, when just over a month ago, the expectation was for a first reduction in June. Pressure is building on the ECB as inflation tumbles and key eurozone economies such as Germany and France flirt with recession. Markets are also predicting that the ECB will cut more often and more deeply through next year.
However, the 70,000 Irish mortgage households whose fixed rates are due to expire over the next several months and who would have faced hefty hikes in their mortgage rates could now likely benefit even before any potential official cuts, because the cost of wholesale funds that banks tap are already falling sharply, said Michael Dowling, a leading mortgage industry expert.
Fixed-rate households were until recently facing significant hikes of 2% to 2.5% in their mortgage rate costs because they had taken out two or three-year fixed rates before the ECB started on its record run of increasing interest rates from July last year.
Mr Dowling said sharp increases in refinancing mortgages will likely no longer apply as market rates tumble ahead of any early rate cut by the ECB.
"I do not see any further increases in fixed rates and if there is any move it will be downward," Mr Dowling said.
It comes as PTSB has said it will cut the cost of its four-year fixed mortgage products by 0.4%. It also plans to increase one of its deposit rate products. Experts have long said that Irish banks have not passed on in full mortgage rate increases, but at the same time have held back on the amount of their increases in deposit rates.
Andrew Kennigham, chief Europe economist at Capital Economics, said the fall in eurozone inflation meant it was "becoming increasingly untenable" for ECB chiefs to insist "they are not even thinking about rate cuts". Capital Economics predicts the ECB will now unveil its first rate cut in June, rather than in September.
Mr Kenningham said that new eurozone-wide figures showed inflation had slowed at the faster-than-expected rate to 2.4% in November from 2.9% in October, because the measure of core inflation had fallen sharply.
The ECB "won’t want to declare victory prematurely and are sure to reiterate at December’s ECB meeting that it is far too early to cut rates", he said.
"With near-recession conditions set to drag on and inflation likely to be close to 2% by the middle of 2024, we now think the case for the bank to ease up on monetary policy by then will be too strong for the ECB to resist," he said.