Editorials

The Irish Times view on the ECB interest rate cut: an important turning point

In a fractured and changing market, it is important for borrowers to consider their options carefully and, if required, to look beyond the bank they have traditionally done business with

The President of the European Central Bank (ECB) Christine Lagarde at a press conference following the meeting of the governing council of the ECB in Frankfurt on Thursday. (Photo by Kirill Kudryavtsev/ AFP)

Thu Jun 6 2024 - 20:20

The European Central Bank’s decision to reduce interest rates for the first time in five years is an important signal. While the reduction is by just a quarter point, it follows 10 increases since the summer of 2022 which have increased interest rates by a cumulative 4.5 percentage points. Further reductions can be expected, though the pace and extent of these remains uncertain.

It may seem strange that the ECB is simultaneously cutting interest rates while also increasing its inflation forecast. However, because borrowing costs are at a record high, they will continue to restrict economic activity – and thus control inflation – even at somewhat lower levels.

Nonetheless, the outlook for the rest of the year will depend on what happens to inflation and to related indicators such as wages. Some uncertainty here has led investors to be a bit less optimistic about the pace of reductions as this year goes on. However, some further cuts can be anticipated.

For Irish mortgage borrowers the news is thus improving, albeit slowly. Those on tracker mortgages will benefit automatically. New borrowers and those whose fixed term mortgage deal is ending have also seen offers improving in some cases. Increased competition and the trend in official rates should mean should further improvement in fixed rate offers as the year goes on.

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Urgings from the Taoiseach’s office to the major banks to pass on the ECB cut are not likely to have much influence. And under competition law banks cannot signal what they plan to do. Tracker interest rates will fall automatically and banks point out that they have not increased other rates to match ECB increases

New competition is, fortunately, having some impact in the market. Together with the downward trend in official rates, this gives some room for optimism. But in a fractured and changing market, it is important for borrowers to consider their options carefully and, if required, to look beyond the bank they have traditionally given their business to. The difference between the best and worst offers remains significant.

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