ECB cuts interest rate to 1.25%

Thu, Nov 3, 2011, 00:00

Minister for Finance Michael Noonan has urged banks to pass on decreases to consumers after the European Central Bank unexpectedly cut interest rates today.

ECB officials, meeting under the presidency of Mario Draghi for the first time, cut the benchmark interest rate by 0.25 of a percentage point to 1.25 per cent.

The decrease in the ECB rate will see the cost of a typical €250,000 tracker mortgage fall by about €32 a month.

Mr Noonan said the financial regulator Matthew Elderfield has made it clear to banks that they need to pass on interest rate cuts.

Mr Noonan, speaking before addressing the Institute of International and European Affairs in Dublin today, said he welcomed the rate cut and hopes it is the first in a series of several in the coming months.

“I hope it’s the first rate cut of a series of three. I think the European economy could do with the injection of a three-quarter per cent rate-cut between now and early in the New Year,” he said.

“Obviously the banks should pass it on. It will automatically pass on with trackers but I think the regulator, Matthew Elderfield, has already made it that he will intervene if he [thinks] that rate-cuts in Europe are being absorbed by the banks rather than being passed on to customers.”

Fianna Fáil finance spokesman Michael McGrath said it was “incumbent” upon Mr Noonan to make sure the interest rate is passed on. “Fine Gael promised to force the banks to absorb interest rate increases but failed to deliver when the ECB twice increased rates earlier this year,” he said.

Permanent tsb bank confirmed this evening that it will cut mortgage rates by 0.25 per cent following today’s announcement by the ECB. The cuts, which will apply to both variable and tracker rate mortgages, will be effective from November 21st.

Speaking at a press conference in Frankfurt, Mr Draghi said the euro zone could subside into a "mild recession" in the latter part of this year.

The Italian has walked into a maelstrom in his first week at the ECB's helm, with euro zone leaders contemplating a future without Greece and economic policy paralysis in his home country threatening to pitch Rome into the storm.

But he offered no commitment to scale up the bank's bond-buying programme to support the likes of Italy and Spain. "What we are observing now is ... slow growth heading towards a mild recession by year-end," Mr Draghi said. "A significant downward revision to forecasts and projections for average real GDP growth in 2012 (are) very likely.”

The rate cut gave a modest boost to stock markets. The FTSEurofirst 300 index of top European shares was up 1.3 per cent this afternoon.

The decision to cut rates came despite inflation in the 17-country euro zone staying at 3.0 per cent for a second month running in October, well above the ECB's target of just below 2 per cent.

Mr Draghi said the ECB expected inflation to subside below 2 per cent next year.

European leaders said earlier before the start of the G20 summit in Cannes that they were prepared for Greece to leave the euro zone to preserve the 12-year-old single currency if Athens does not decide quickly to implement a bailout programme, putting the likes of Italy and Spain, and even France, firmly in the markets' sights.

Mr Draghi succeeded France's Jean-Claude Trichet as ECB chief on Tuesday.