THE EUROPEAN Central Bank (ECB) has cut borrowing costs by a record level in a bid to stimulate economic activity, as the euro zone sinks deeper into recession.
The ECB reduced the benchmark interest rate, which sets variable rate mortgage costs, by three-quarters of a percentage point - from 3.25 per cent to 2.5 per cent, its lowest level since June 2006.
The reduction is the steepest by the ECB in its 10-year history. Mortgage holders can expect their monthly repayments to fall by €43 for every €100,000 borrowed, based on a loan with a 30-year term. In just short of two months, the ECB has reduced its benchmark interest base rate from 4.25 per cent to 2.5 per cent in three successive cuts.
This has left borrowers with a €300,000 mortgage on a 30-year term paying €309 less now on their monthly repayments than in September.
Among the mortgage lenders, AIB, Bank of Ireland and Halifax- Bank of Scotland (Ireland) said they would be passing on the full reduction to customers on variable mortgage interest rates.
The State's two largest banks also introduced lower-rate products for first-time buyers in a bid to generate activity in the property market. AIB is offering a one-year fixedrate of 2.99 per cent, while Bank of Ireland announced a 3.05 per cent rate for the same product.
Analysts suggested deteriorating economic conditions may press the ECB to cut its key rate to as low as 1.5 per cent by March.
However, ECB president Jean-Claude Trichet signalled he was reluctant to reduce rates so low that economic policymakers were "trapped" with few options to deal with a deepening recession.
The ECB has been more measured than other central banks in response to the global recession. The Bank of England slashed its key interest rate by one percentage point to 2 per cent, its lowest level since 1951, in an effort to shore up the UK's faltering economy and stem deflation.
The higher interest rate cut from the UK central bank pushed sterling to a record low against the euro, which traded at 86.9p against the currency, its strongest level since it was created in 1999.
This creates greater price differences among products either side of the Border. Mr Trichet said the global economy was likely to remain weak next year and he expected the eurozone economy to shrink by between 0.5 and 1 per cent in 2009. He said the turmoil on financial markets could further weaken the euro-zone economy. "The level of uncertainty remains exceptionally high," he said.
Euro zone inflation plunged by 1.1 percentage points in November, the biggest drop since the euro zone was created 10 years ago, to 2.1 per cent. Mr Trichet said that demand would slow further.
AIB is forecasting two further rate cuts of 0.5 per cent in the coming months, taking ECB rates to 1.5 per cent, "if not lower", in 2009. Citigroup expects ECB rate cuts to continue in February, falling to 1 per cent, or even lower, by the middle of next year.
Plans on the future bonuses to be paid to senior bankers at the six Irish guaranteed financial institutions must be submitted to the State's bank remuneration oversight committee today under the terms of the guarantee scheme.
The six institutions must show in reports how bonuses to senior management will reflect their attempts to
reduce riskier lending and improve "long-term sustainability" over the two years of the State guarantee. Anglo's shares tumbled for a second day, dropping 28 per cent to 48 cent, after the bank reported on Wednesday a 37 per cent drop in profits and an almost ninefold increase in bad debts.
The sharp declines mean Irish Life & Permanent has replaced Anglo as the State's third-largest publicly quoted bank.