Irish mortgage holders to benefit from low rates for another two years

Irish mortgage holders are likely to benefit from the current climate of ultra-low interest rates for another two years with European Central Bank chief Mario Draghi signalling Frankfurt is unlikely to begin a cycle of rate hikes until at least 2019.

Addressing a conference in Frankfurt to mark the third anniversary of the launch of the euro zone’s banking watchdog, the Single Supervisory Mechanism, Mr Draghi said: “There is little evidence that negative rates are undermining banking profitability.”

He also said banks should concentrate on cutting costs instead of blaming poor levels of profitability on Frankfurt.

Rate

“Given the tone of Draghi’s comments there is a good chance we won’t see a rate increase under his watch,” Merrion economist Alan McQuaid said.

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“His term at the ECB expires at end-October 2019, so as things currently stand we could be at least another two years before we see a hike in rates, good news for mortgage holders and businesses, but not so depositors,” Mr McQuaid said.

The ECB has kept its key policy rate unchanged at 0 per cent for more than a year, and more recently the deposit rate at -0.4 per cent, effectively penalising retail banks for keeping money on deposit with Frankfurt.

Tracker mortgage holders, which represent the largest cohort of mortgage holders here with 43.9 per cent of the market, have benefited the most from the ECB’s policy as the interest rate charged on tracker policies is tied directly to the official ECB rate.

While the majority of variable rate holders, which represent 43. 5 per cent of mortgage holders, pay more than the euro area average, for reasons peculiar to the Irish banks, they still benefit from low rates generally.

Programme

Mr Draghi previously signalled that the bank would discuss how to start winding down its asset purchase programme – better known as quantitative easing (QE) - towards the end of this year.

Speculation is now rife that strong growth and falling unemployment across the euro zone will prompt the ECB will begin to tapering its monthly purchases of government and corporate bonds from January next year.

The longer Frankfurt keeps monetary stimulus in place, the further back investors are likely to push expectations for a rate rise.

“It is likely that the ECB will stick to sequencing of policy at least until it has managed to end QE,” Mr McQuaid said.

“As long as interest rates remain negative and expectations of ECB tightening are contained it is going to be difficult for euro zone bond yields to move higher,” he added.