ECB cuts rates to 0.15% to stimulate recovery

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

Thu, Jun 5, 2014, 17:41

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.”