ECB surprises markets with smaller than expected interest rate cut

THE EUROPEAN Central Bank (ECB) surprised financial markets by cutting its main interest rate by a smaller than expected 25 basis points yesterday to a new low of 1.25 per cent.

The move will result in monthly repayments on many typical mortgages falling by €25 to €65 but it has disappointed analysts who had hoped for a 50 basis points reduction.

The rate cut will result in a saving of about €40 per month for holders of an average €300,000 mortgage over 30 years, based on a tracker mortgage with a margin of 1.3 percentage points over the ECB rate.

Monthly repayments on a mortgage of this type have fallen by approximately €520 since October 2008, when the ECB began a series of six reductions that have taken its key lending rate from 4.25 per cent to 1.25 per cent.

Halifax and Bank of Scotland (Ireland) said they will pass the full reduction to all holders of a variable rate mortgage.

Permanent tsb, AIB, EBS, National Irish Bank, Bank of Ireland and the ICS Building Society said they will pass on the full ECB rate decrease to owner-occupiers.

Ulster Bank and First Active have yet to make a decision on whether they will pass on the rate cut to variable mortgage customers.

KBC Homeloans has also not yet decided whether to pass on the the reduction.

The ECB also lowered its overnight deposit rate – the rate currently setting the floor in money markets – by 25 points, taking this down to 0.25 per cent.

ECB president Jean-Claude Trichet hinted yesterday that the bank may lower rates even further.

“I would say very candidly as regarding the main policy rate it is not the lowest limit. I do not exclude that we could in a very measured way go down from the present level,” he said.

He also said the bank would decide whether to take further “non-standard” measures in its monetary policy at its next meeting in May.

However, he did not indicate whether the ECB would follow other central banks in moving towards quantitative easing.

Both the Bank of England and the US Federal Reserve have introduced quantitative easing – whereby they increase the amount of money in the system – as they try to counter the economic downturn.

The ECB has been cutting rates in an effort to stimulate the euro zone economy as latest economic data have shown little sign of a let-up in the recession.

Annual inflation hit a record low of 0.6 per cent in March – well below the ECB’s target of “below but close” to 2 per cent – and is expected to fall further.

The OECD has warned that unemployment in the euro zone could rise to almost 12 per cent in 2010.

Austin Hughes, chief economist with KBC Bank Ireland, described the rate cut as overly cautious.

He said the extent of the deterioration in economic conditions “point towards the need for notably stronger and speedier action than Mr Trichet signalled today”.