THE EUROPEAN Central Bank has cut interest rates to an all-time low and signalled that a further cut is likely, after it issued a gloomy new economic forecast predicting a deep and lengthy recession for the euro zone.
The historic move by the ECB to slash its key lending rate by a half point to 1.5 per cent, designed to bolster the euro zone economy, will result in repayments on many typical mortgages falling by about €50 to €150.
Permanent TSB, Bank of Ireland and AIB passed on the rate cut to owner-occupiers on variable interest rates yesterday, but said they had not yet decided whether they would lower rates for holders of buy-to-let mortgages.
However, not all mortgage lenders said they would pass on the rate cut to holders of variable rate mortgages. Ulster Bank and First Active said it would not be immediately passing on the rate cut to variable mortgage customers, with a spokeswoman indicating that bank was reviewing the implication of the rate cut and would announce its decision within days.
National Irish Bank said it would not be passing on the rate cut to its variable rate customers.
The change in rates is automatically applied to tracker mortgages by all lenders.
The rate cut will result in a further saving of about €80 per month for the holders of a €300,000 mortgage over 30 years, based on a tracker mortgage with a margin of 1.3 percentage points over the ECB rate.
The monthly repayments on a mortgage of this type have fallen almost €500 since October 2008, when the ECB began its series of interest rate cuts.
The ECB has now taken its key lending rate from 4.25 per cent to 1.5 per cent in a bid to stop the euro zone from sinking into a deflationary slump. Yesterday, it predicted that the recession-hit euro zone economy could shrink by as much as 3.2 per cent this year. This forecast is more than three times gloomier than its previous worst-case scenario.
ECB governing council president Jean-Claude Trichet said he would not exclude further cuts, but refused to be pinned down on how soon the ECB could cut rates again or how low interest rates could go.
“We did not decide ex ante that this was the lowest point that we could attain. Further decisions will depend on facts, figures, judgment on the basis of governing council discussions,” he said.
Economists said the larger-than-expected slashing of the ECB’s forecasts on growth and inflation meant interest rates were likely to fall to 1 per cent by the summer.
However, the ECB is reluctant to cut rates lower than 1 per cent. Governing council member and head of the German Bundesbank Alex Weber indicated that this would be the “lowest limit” for him, while Mr Trichet said there were a number of drawbacks with cutting interest rates all the way to zero.
Mr Trichet declined to specify if and when the ECB would resort to quantitative easing measures in order to stabilise the economy. Quantitative easing, known as “printing money”, is a way in which central banks can pump money into the financial system, encourage banks to start lending again and kick-start the economy.
The Bank of England yesterday took the unprecedented step of printing money, by announcing it would buy government bonds (known as gilts) and corporate debt in a move that will flood the UK financial system with £75 billion of newly- created money. It also cut its interest rates to a record low of 0.5 per cent.
Although the succession of rate cuts will be welcomed by mortgage holders, they also reflect the extent to which the global economy has unravelled since the collapse of investment bank Lehmans in September 2008. Savers are also likely to see the interest rates paid on their deposit accounts fall in the coming weeks following the ECB’s move.
Diarmuid Kelly, chief executive of the Professional Insurance Brokers Association, said the rate cuts would boost the subdued mortgage market by improving affordability for first-time buyers. “While property prices have not yet bottomed out, there are fledgling signs of increased mortgage lending,” Mr Kelly said.