Further interest rate cuts expected with EU economy 'losing momentum'
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The European Central Bank (ECB) has kept the door open for future interest rate cuts in the new year as the economic recovery across the bloc shows signs of “losing momentum” amid growing concerns of greater friction in global trade.
Following a monetary policy meeting on Thursday, ECB President Christine Lagarde announced an interest rate cut of 0.25% which will immediately benefit those on tracker mortgages.
Broker and managing director of Dowling Financial, Michael Dowling, has said this 0.25% cut will see tracker mortgage repayments drop by €13 a month for every €100,000 they owe.
“Mortgage repayments will have fallen by €52 per month on every €100,000 since June,” he added. “The really good news for mortgage holders is that markets are pricing in a further 1% decrease in 2025 which will see mortgage repayments for tracker holders fall by a further €52 per month for every €100,000 owed.”
“I expect fixed rates to fall to 3% for three- and five-year fixed options which will bring reductions of €85 to €125 per month on the average €300,0000 mortgage for new or switcher mortgage customers,” he said.
However, the rate reduction comes as the ECB expressed concerns over a slower economic recovery than was seen in the September projections. The eurozone economy is expected to grow by just 0.7% this year and 1.1% next year.
Headline inflation is expected to average out at 2.4% this year and 2.1% next year. The ECB’s goal is to get inflation to 2% over the medium term.
Ms Lagarde said the latest information suggests that European economic growth “ is losing momentum” and that surveys indicate that manufacturing is still contracting and growth in services is slowing.
“The risks to economic growth remain tilted to the downside. The risk of greater friction in global trade could weigh on euro area growth by dampening exports and weakening the global economy,” Ms Lagarde said.
In previous announcements of interest rate cuts, the ECB said it would keep interest rates “sufficiently restrictive” for as long as necessary but this was omitted during the announcement on Thursday.
Economist with Deloitte, Kate English, said that while the ECB is not committing to a particular path for interest rates, the “subtle language changes” further reinforces a “growing focus that would be on what is Europe's recovery and how can it be competitive in 2025”.
Ms English said the European economy is not recovering at the pace that was expected and there is a lot of uncertainty at the moment particularly given political issues in Germany and France.
"All that combined makes for a lot of focus on what is that economic outlook and what can we do to stimulate it going forward. My expectation for 2025 is that we will continue to see further rate cuts from the ECB in 2025,” she said.
Investment Strategist at Davy, Stephen Grissing, said the ECB has paved the way for rates to be reduced to “more supportive levels in 2025”. “The futures market is anticipating an additional 125 basis points of cuts by the end of 2025, which would bring the ECB rate down to 1.75%,” he said.