ECB cuts interest rates for the first time in almost two years
President Ap Central Bank Probst European Lagarde Pic: Christine Photo/michael
The European Central Bank (ECB) announced a 0.25% reduction to its main lending rate following an aggressive campaign of interest rate hikes used to drive down sticky inflation.
The base rate has subsequently reduced to 4.25%, marking the first interest rate cut announced by the regulator since it began increasing almost two years ago, and experts are pricing in at least one more reduction before the end of the year.
"It is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady," the ECB said.
This reduction will immediately impact tracker mortgage holders. There are 179,000 customers with tracker mortgages who owe €15.4bn.
Broker and Managing director of MortgageLine Stephen Hamilton said the reduction will shave around €30 monthly repayments for a typical tracker mortgage holder.
However, banks are unlikely to be quick in passing on the cut to customers as they were slow in general to pass on increases.
Over the last two years, banks in the Republic only increased their fixed rates by 1.75% to 2% and variable rates increased by just 1% in the AIB Group, which includes EBS and Haven. Bank of Ireland reduced its variable rate and PTSB increased theirs by 0.25%.
“Banks will not pass on the full rate reductions as their appetite for market share and, more importantly, profitability determines the pricing of fixed and variable rate mortgages,” said Michael Dowling broker and managing director of Dowling Financial.
Reacting to the decision of the ECB the Minister for Finance Michael McGrath said mortgage customers should be treated fairly and consistently by Irish banks when it comes to rates.
"If interest rates were increased in line with the ECB decision then they should come down in line with the ECB decision," he said on RTÉ Radio.
Taoiseach Simon Harris said he has written to banks in the Republic and will arrange a meeting with them to discuss the need to pass on rate reductions.
Meanwhile, Sinn Féin finance spokesperson Pearse Doherty has urged banks to pass on the reduction “following a time of massive profits for the banks, over €4bn last year, and huge payouts for their shareholders as a result of rising interest rates.”
The Banking and Payments Federation, a group representing the interesting of banks, said that interest rates and pricing of lending is a commercial matter for lenders in the market place. "In addition, lenders are legally prohibited – under strict competition rules – from signalling any future pricing change either publicly or privately," its chief executive Brian Hayes said.
Since July 2022, the ECB hiked its main lending rate from 0% to 4.5% through 10 successive increases, with the final one announced last September. The regulator has kept its rate unchanged until now.
Some analysts and economists are predicting two more cuts following today’s announcement but others are more sceptical amid lingering economic volatility.
The ECB maintains committed to driving inflation down to its target of 2%, however eurozone inflation crept upwards to 2.6% in May from 2.4% in the previous month, representing the first jump this year.
The ECB said it "will keep policy rates sufficiently restrictive for as long as necessary" to achieve its 2% target.
Elsewhere, wage growth in the eurozone amid cost pressures continues to concern some policymakers, including ECB chief economist Philip Lane.
"Despite the progress over recent quarters, domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year," in its rate decision statement today.
The ECB's decision today diverts from a more hawkish path by the US regulator the Federal Reserve who are yet to cut interest rates.