Borrower or saver: What ECB rate cut means for your pocket

What will the ECB decision mean for borrowers and savers. Here are the quick takeaways from today’s announcement, in terms of how it will affect your pocket.

1. Borrowers: In a surprise move, the ECB cut its main refinancing rate, already at a historic low of 0.05 per cent, to zero per cent. This will mean tracker mortgage rates will fall by the same amount. The cash savings will be small - around €3 to €4 a month for many of the 400,000 or so tracker mortgage holders in the country. This move, and a separate decision by the ECB to cut the rate it gives banks who deposit funds with it deeper into negative territory, show that interest rates are going to stay low for a long time to come. The market is not anticipating any increase from the ECB for years to come - though of course markets have been wrong in the past.

The important message for tracker mortgage holders is not that they will be able to afford an additional pint every few weeks, but rather that they will not face a rise in repayments for some years.

Also, the low interest rate environment should mean competition remains in the market and this should keep standard variable mortgage rates (SVR’s) edging lower. Already borrowers are seeing these rates fall a bit, though there has been greater competition in offering fixed rate products, as banks try to tie borrowers in, fearing increased competition in the months ahead. New competition may also lead to the main SVR rates continuing to edge down – certainly for new business – particular as new players enter the market. For borrowers deciding whether to take a new loan, or move from an SVR to a fixed rate products, these are important trends.

2. Savers: Returns to savers are on the floor and are going to stay there. Today's ECB action underpins this. Banks are trying to hold their profit margins at reasonable rates and with borrowing rates under downward pressure, deposit rates face the same outlook. Demand deposits for personal customers and also for businesses are already as close to zero as almost makes no difference in many cases. Some slightly better deals are available, subject to terms and conditions, and depositors get a bit more if they are prepared to lock their money up. And with inflation effectively zero too, at least depositors are not seeting the real value of their cash eroded by price rises.

Banks are now likely to continue to trim these deposit rates where they can to protect their margins in so far as is possible. Some have already complained to the ECB about the impact on their margins of the negative deposit rates now on offer to them from the ECB . It is unlikely that banks will follow the ECB and actually offer negative rates to depositors, for the simple reason that they do not want them to move their money elsewhere, or keep it under the mattress.

For depositors, the choice is whether to leave their money in the bank earning very little, or take the risk of a stock market investment or putting cash into a so-called “structured” product offered now by many advisers. These offer some possibility of a higher return, but will involve some risk and some fees. For the moment advisers say that many savers are resigning themselves to getting little or no return, having content themselves with keeping their money safe and having instant access to it. Like borrowers , they are having to adapt to a world where interest rates are low, and are going to remain low for a long time to come.