Cheaper mortgages for homeowners are on the way, following yesterday's interest rate cut by the European Central Bank (ECB). It is expected that the majority of lending institutions will pass on the quarter-point reduction to customers within weeks.

The Bank's governing council lowered its benchmark interest rate by a quarter of a percentage point to 4.25 per cent yesterday in its first meeting after the summer break, as it unveiled the new euro coins and notes.

In Ireland, the first institutions to move were Irish Permanent and First Active, who said they would reduce interest rates for borrowers to 5.64 per cent and 5.63 per cent respectively. However, existing customers will have to wait some weeks before the reductions kick in.

AIB and Bank of Ireland will announce rate cuts which should be implemented by the end of next week. AIB's variable rate is currently 5.425 per cent. The reductions will amount to savings of up to £15 (€19) a month for those with a £100,000 mortgage.

The ECB is expected to cut its benchmark interest rate further over the coming months.

According to Mr Jim Power, investment director at Friends First, the ECB base rate is likely to be another half percentage lower at 3.75 per cent by Christmas.

That would result in more significant savings for homeowners, although it will also reduce the return for savers by similar amounts.

Mr Power said yesterday's reduction is likely to do little to boost house prices, according to Mr Power, as buyers are now more focused on job worries than on repayment levels.

Labour Party Finance spokesman, Mr Derek McDowell, welcomed the rate cut. "On balance, I believe this to be in the best long-term interests of the Irish economy.

"In view of the current difficulties in the US economy, it is not in our national interest to see the euro zone slide towards recession.

Small reductions in interest rates should go some way to preventing that while not fuelling inflation," Mr McDowell said.

The Bank is anticipating lower inflation, and ECB president Mr Wim Duisenberg said he was happy that inflationary pressure had eased, adding that the target euro zone inflation rate of 2 per cent would be reached in the medium term.

"While we believe that core inflation rate will come down, it may take longer than the next few months. We believe the overall inflation rate will be below the desired 2 per cent level in the course of the first half of next year," he said. More worryingly, he conceded that the US slowdown was "larger, deeper and lasting longer" than the Bank had first expected, with lasting consequences for the euro zone.

"We did not underestimate the impact, rather the length of the US slowdown. Together with the US authorities, we tended to be too optimistic about the duration and depth of the slowdown," he said.

The rate cut gave a boost to the euro on currency markets, with the currency strengthening to $0.9129 shortly after the announcement.

Yesterday was only the third time in its history that the bank has lowered interest rates, and the second time this year. The move ended a month-long game of "will they or won't they" among analysts. In the past, the Bank has shown reluctance to cut interest rates while inflation in the euro zone is above its target 2 per cent.

But fears that the governing council would wait for more concrete proof of a slowing trend in inflation before acting proved unfounded. Mr Duisenberg immediately tried to dampen speculation of any interest rate cuts in the near future "compatible with the maintenance of price stability in the medium term".

"I cannot forecast when the next move in whatever direction will come; only when new information becomes available we will make new decisions or no decision," he said. However, most analysts expect at least one more cut this year with another by early next year.

Mr Duisenberg admitted yesterday that the ECB's June estimate of 2 per cent growth in the euro zone this year was unlikely to be reached.

We believe we have to revise that figure downward but a new broad forecast will not come before December," he said.