ECB to buy loans as it cuts interest rates to historic low

Mortgage holders got a boost yesterday, when the European Central Bank cut interest rates to a record low of 0.05 per cent in an effort to kick-start the ailing euro zone economy.

The announcement coincided with a separate plan unveiled by Frankfurt to boost lending by banks across the euro zone. The bank said it would buy packages of loans – known as assets backed securities and covered bonds – from banks to encourage them to lend more.

While some estimates suggest the ECB programme could lead to buying €500 billion of loans over three years, most analysts expect the impact to be much smaller.

While declining to put a figure on the loan-purchasing programme, ECB chief Mario Draghi said it would have a "sizeable impact" on the ECB's balance sheet and will "support the provision of credit to the broad economy".

More details will be announced next month, he said.

The ECB said it would buy packages of residential mortgages, which could be a significant boost for Irish banks and the housing market. It could potentially allow banks to give more new mortgages because existing mortgages can be sold on to the ECB, freeing up capital to back new lending. The same could apply to small-business lending.

Tracker mortgages

If the ECB bought tracker mortgages from banks it could be a huge boon. Banks lose money on these loans – which account for about half of all mortgages by value. They were sold in the boom and have an interest rate linked to ECB rates which have fallen to record lows.

AIB

,

Bank of Ireland

and

Permanent TSB

have about €50 billion worth of trackers and selling them would help profitability and free up capital.

The suite of measures announced by the bank yesterday comes as the European Central Bank attempts to respond to worrying signs of a slowdown in the euro zone economy.

While Ireland's economy has improved since exiting the bailout, concerns are growing about the state of the euro zone economy as a whole, with low inflation a particular concern, and countries such as France and Italy struggling to emerge from recession.

Slowdown

A string of economic figures over the summer have pointed to a slowdown in the euro zone, with gross domestic product stalling in the second quarter of the year and contracting by 0.2 per cent in

Germany

, the euro zone’s largest economy. Inflation is also continuing its downward slide, reaching a five-year low of 0.3 per cent in August, well below the ECB’s target of keeping inflation “close to but below” 2 per cent.

ECB chief Mr Draghi said a "comfortable majority " of the governing council, including Irish Central Bank governor Patrick Honohan, backed the stimulus package, though Reuters quoted unnamed sources as saying that German Bundesbank chief Jens Weidmann opposed both the interest-rate cut and loan-buying.

Despite the new measures, the bank stopped short of embarking on a full quantitative easing programme which would involve buying government debt. Central banks in the US, Britain and Japan have all bought back government bonds from banks to encourage them to lend more. The ECB has come in for criticism for failing to follow suit.

European stock markets rose strongly yesterday on the news, led by banks.