ECB cuts rates to 0.15% to stimulate recovery

Tracker mortgage holders in Ireland set to gain from latest rate reduction


Euro zone interest rates were cut from 0.25 per cent to 0.15 per cent today in a bid to revive the continent’s moribund economy and stave off the threat of deflation.

The European Central Bank also cut the overnight deposit rate for lenders that hold money with it from zero to -0.1 per cent - effectively penalising them for hoarding cash and pushing them to lend.

It comes after inflation in the 18-nation bloc fell to 0.5 per cent while growth in the first quarter was confirmed at a lacklustre 0.2 per cent and survey data, released yesterday, indicated further slowing.

Nearly 400,0000 people in Ireland, accounting for some 60 per cent of the total home loan market, are on tracker mortgages and will stand to gain from the move.

The monthly cost of servicing a €100,000 tracker mortgage will fall by about €6, so the average tracker mortgage holder with an outstanding loan of €300,000 will see monthly repayments fall by €18 .

It is the sixth ECB rate reduction in the last two-and-a-half years and those with a tracker mortgage of €300,000 will pay about €243 a month less than they were paying in the autumn of 2011, an annual saving of €2,916.

Markets sent the euro to a four-month low of $1.3575 after news of the cut.

“Further monetary policy measures to enhance the functioning of the monetary policy transmission mechanism will be communicated in a press release to be published at 3.30pm today,” the ECB said in a statement.

Investors first turn their attention to ECB president Mario Draghi’s news conference at which he is widely expected to present other measures to complement the rate move.

“This is a baby rate cut - a tweak to the policy stance,” said RBS economist Richard Barwell, adding that Draghi needed to announce a bundle of measures to avoid disappointing markets.

Economists polled by Reuters had expected the ECB to cut the refinancing rate to 0.10 per cent from 0.25 per cent and the deposit rate to -0.10 per cent from zero, as well as launching a refinancing operation aimed at funding firms.

Reuters reported last month that the ECB was preparing a package of policy options for this week’s meeting, including the rate cuts and targeted measures with a view to boosting lending to small- and mid-sized firms (SMEs).

“I think expectations are very high,” Mr Barwell added. “To exceed them, I think he (Draghi) is going to have to talk up the prospect of asset purchases in the near future.”

Just hours before the ECB policy decision, a Bank of Japan policymaker sounded a warning, saying the euro zone should not take lightly the potential danger of slipping into a Japan-style deflationary period.

In April, Mr Draghi set out three broad scenarios for ECB policy action and included the possibility of a broad-based asset-purchase programme in the event of a worsening of the medium-term inflation outlook.

Such a programme is unlikely for now, however, even though euro zone annual inflation unexpectedly slowed to 0.5 per cent last month, figures published earlier this week showed. The ECB targets inflation of close to but below 2 per cent.

Mr Draghi will present updated inflation and growth projections from ECB staff at his news conference. In March, the forecasts showed it would take over two years for inflation to get near the ECB’s target. A weaker outlook will support robust ECB action.

The ECB is widely expected to accompany the rate cuts with other measures such as offering banks cheap, long-term funding - a so-called LTRO - on condition that they use this financing to further lending to companies.

Euro zone inflation has been stuck in what Mr Draghi has called “the danger zone” below 1 per cent since October, mainly because of weaker commodity and food prices, but also because of wage and other adjustments in euro zone crisis countries.

The stronger euro exchange rate exacerbates these dynamics.

At the same time, record low interest rates are still not feeding through evenly to companies across the currency bloc. Companies in Portugal, for example, are paying on average 5.4 per cent on loans compared with 2.2 per cent in Finland or France.

This particularly affects smaller companies, which rely strongly on bank funding and make up the bulk of the economy.

Another possibility is for the ECB to extend its provision of unlimited access to central bank funding beyond July 2015.

US-style quantitative easing (QE) - money printing to buy assets - is likely to remain someway off, however, as it is the last weapon at the ECB’s disposal and the barriers to using it are high for the hawkish contingent on the governing council.

“We expect the big QE-bazooka to remain in the closet,” said ING economist Carsten Brzeski.