The European Central Bank cut interest rates to an all-time low today and signalled further easing was possible as its staff forecast the euro zone economy could shrink by more than three per cent this year.
The ECB kept up its recent record pace of interest rate reductions, cutting by another 50 basis points to take its benchmark rate to 1.5 per cent, the lowest in its 10-year history.
The rate cut will result in a saving of €50 per month for the holders of a €200,000 mortgage over 20 years, based on a tracker mortgage with a margin of 1.3 percentage points.
As a result average monthly repayments for holder of such a mortgage will decline from €1,139 per month to €1,089.
Ulster Bank and First Active said today they would not be immediately passing on the interest rate cut to holders of variable rate mortgages. A spokeswoman said the bank was reviewing the implications of the rate cut and said a decision would be announced "within days". National Irish Bank said it will not be passing on the reduction for variable rate customers.
However, the rate cut change will apply for tracker mortgage holders with both lenders from April 1st.
President Jean-Claude Trichet said he could not exclude further cuts, but refused to be pinned down on how soon the ECB could cut again, how low rates could go or if and when the bank would embark on the bond-buying operations used by other central banks to boost the economy.
Asked if rates had hit the bottom, he said: "We did not decide ex ante that this was the lowest point that we could attain. Further decisions will depend on facts, figures, judgement on the basis of Governing Council discussions."
Speaking later ECB Governing Council member and head of the German Bundesbank, Axel Weber gave a stronger indications that rates may fall further. "We have now used room to go down. We have not exhausted that," Mr Weber told German TV station ARD.
Economists said the likelihood of the main refinancing rate hitting 1 per cent by mid-year was increased by the ECB slashing in-house economic forecasts on both growth and inflation by a far larger margin than most had expected.
Mr Trichet said today’s rates decision was made by consensus, rather than unanimous - suggesting rate setters were spilt on how much to cut rates by.
He stressed inflation was now expected to undershoot the ECB's price stability goal of below but close to 2 per cent both this year and next. "Inflation rates have decreased significantly and are now expected to remain well below two percent over 2009 and 2010," he told a news conference.
ECB staff predicted the recession-hit euro zone's economy could shrink by as much as 3.2 per cent this year, more than three-times gloomier than its previous worst-case scenario and more pessimistic than even most economists.