ECB cuts benchmark rate by quarter-point in first back-to-back reduction in over a decade 

The quarter-point cut has lowered to ECB's deposit rate to 3.25%, with money markets almost fully pricing in three further cuts through next March.

"This reduction will save Tracker mortgage holders €13 per month for every €100,000 they owe," said broker and managing director of Dowling Financial Michael Dowling.

This is the ECB's third official rate cut since embarking on its aggressive monetary policy campaign to tame surging inflation, with attention now likely to turn to Ireland's pillar banks who have posted record profits in the past twelve months on the back of high interest rates. 

"The mainstream lenders have all adjusted their fixed rates, minor with the exception of PTSB since May," says Mr Dowling.

"We have had three ECB rate reductions this year, and the realignment reduction of 0.35%. However, we balance this information with the knowledge that when the ECB base rate rose by 4.5% between June 2022 and October 2023, fixed rates only rose by 1.75% with the mainstream lenders."

Despite instant benefits for the 179,000 customers on tracker mortgages, Mr Dowling says he does not foresee immediate cuts for variable rate or fixed rate customers.

"On balance, if fixed rates get to 3% over the next 12-15 months, that is the goal and where borrowers should lock in long-term, but it will depend on their lender and their approach on green and non-green customers."

Trevor Grant, Chairperson of Irish Mortgage Advisors noted: "While house hunters and homeowners may be hoping that the banks start to reduce their variable or Loan-to-Value variable rates now, they must remember that Irish home-loan variable and indeed fixed mortgage rates are highly unlikely to fall to the same extent as ECB rates."

"But let’s not forget that competition too can lead to cheaper mortgages for homeowners. In the coming months, it's likely that competition - and not ECB rate cuts - will bring reduced home loan interest rates."

Further cuts

Markets are expecting another cut before Christmas with rates likely to level out at about 2.25% by the end of 2025.

Latest economic data is likely to have tilted the balance within the ECB in favour of a rate cut, with business activity and sentiment surveys as well as the inflation reading for September all coming in slightly lower than expected.

In addition, euro area inflation in September fell to 1.7%, new figures released by Eurostat show, down from 2.2% in August and marking the first time price levels have fallen below the bank's 2% target for the first time in three years.

While inflation may edge above 2% by the end of this year, it is expected to hover around that level or even slightly lower in the "medium term," the time horizon watched by policymakers.

"The incoming information on inflation shows that the disinflationary process is well on track," the ECB said on Thursday. 

"The inflation outlook is also affected by recent downside surprises in indicators of economic activity. Meanwhile, financing conditions remain restrictive."

The ECB did not provide any indication about future moves in its statement, instead repeating its mantra that decisions will be made "meeting by meeting" based on incoming data.

While taming inflation, high interest rates have sapped investment and economic growth, which has struggled for almost two years. The most recent data on industrial output and bank lending is pointing to more of the same in the coming months.

An exceptionally resilient labour market is also now starting to show some cracks, with the proportion of vacant jobs as a share of the total falling from record highs, fuelling calls inside the ECB to ease policy before it is too late.