Speculation ECB will cut rate again to 0.5% today

THERE WAS intense speculation on financial markets yesterday that the European Central Bank will cut its key interest rate by a quarter of a point this afternoon in an effort to stimulate growth across the euro zone.

While any rate cut will be aimed at boosting flagging growth in Germany, Irish homeowners will be more immediate beneficiaries.

For every quarter of a point the ECB lowers rates, the monthly cost of servicing a €100,000 tracker mortgage declines by about €15. This means the average tracker mortgage holder with a loan of €300,000 will see monthly savings of €45 from October if the bank cuts rates to 0.5 per cent.

Over the last 12 months the bank has reduced its rates by 0.75 per cent, and a further cut today would mean a person with an average-sized tracker mortgage would be paying more than €180 a month less in repayments in October than a year ago.

In February 2009, the ECB rate stood at 2 per cent. If a cut is announced today the annual repayment on a €300,000 loan will have fallen by €3,240 in the interim. Despite the rate cuts, the Republic’s mortgage arrears crisis has continued to worsen. More than one in five home loans were in financial difficulty at the end of June, the Central Bank said.

At the end of June, 168,637 owner-occupier mortgages, or just more than 22 per cent of the 761,533 home loans in the State, were either in arrears or modified to help with repayments. This was up from 162,572, or 21.3 per cent, three months earlier.

Traders on international markets were yesterday split fairly evenly on the likelihood of a cut. The scale of the euro zone crisis has made the ECB’s intentions more difficult to read, but a significant fall in the interest rates banks charge each other in recent weeks along with weak economic data from Germany has convinced many a rate cut today is inevitable.

A move would benefit more than 400,000 Irish homeowners with tracker mortgages, but more than 200,000 people on standard variable rate mortgages are unlikely to see any benefit.

Only two lenders passed on the ECB’s last rate cut to their customers, while others signalled their intention to increase their variable rates in the weeks ahead.

Meanwhile, an even more important announcement on a new bond-purchase programme is to be announced today.

GO FIGURE: DRINK BUCKS TREND:

DESPITE THE third consecutive annual fall in total consumer spending, households increased their purchases of alcohol last year, according to new figures from the Central Statistics Office.

The €6.4 billion spent on drink in pubs, off-licences and restaurants was more than twice the amount spent on clothing and footwear, and close to that spent on food. But the amount spent on alcohol last year was one-eighth down on the amount in the last year of the property party, 2007.

Other leisure-related spending items were among the biggest fallers last year. Recreation, entertainment and education spending are, curiously, grouped together by statisticians. Last year Irish consumers paid €8.7 billion for these services, down by more than 8 per cent on 2010. Of the major spending items, this category registered the biggest fall last year.

The end of boom times has also meant fewer foreign trips. Consumer spend abroad suffered the second largest annual decline, dropping by more than 6 per cent.

Spending on food and non-alcoholic beverages rose more than any other item last year, mostly owing to higher global commodity prices.

World production patterns also continue to have a major influence on clothing and footwear prices. They have been in sharp decline for more than a decade as freer world markets have allowed imports of cheap garments and shoes from developing countries. DAN O'BRIEN