MORTGAGE HOLDERS could see their interest rates fall again next month after European Central Bank (ECB) president Jean-Claude Trichet hinted yesterday at the possibility of a half-point cut in rates in March. Such a move would take the euro zone key interest rate down to a historic low of 1.5 per cent.
“I don’t exclude that we could decrease interest rates at our next meeting,” Mr Trichet said at a press conference in Frankfurt. When asked whether the ECB was likely to cut rates by a half or a quarter-point, Mr Trichet said that it would “probably be more the first figure”. However, he added that the governing council had made “no pre-commitment on anything . . . we are very open.”
The ECB left its key rate at 2 per cent yesterday as it had signalled it would do in January. Mr Trichet said the level of uncertainty in the euro zone economy remained “exceptionally high”, with both upside and downside risks to price stability as imbalances in the global economy unwind.
A half-point cut in interest rates typically reduces mortgage repayments by €50 to €150 per month, assuming mortgage lenders pass on the cut.
The ECB has made a rapid series of interest rate cuts since October, taking its key rate from 4.25 per cent to 2 per cent as economic activity deteriorated sharply, putting the euro zone into recession. However, it has been less aggressive than the Bank of England, which has slashed interest rates to 1 per cent.
Mr Trichet indicated yesterday that there was a limit to how far the ECB would go with its monetary policy in using rate cuts to stimulate economic activity.
Inflation in the euro zone fell to 1.1 per cent in January, down from 1.6 per cent as measured by the Harmonised Index of Consumer Prices, which would appear to give the ECB room to implement a further rate cut and maintain its policy aim of keeping inflation below but close to 2 per cent over the medium term. However, the drop in inflation is largely because food and energy prices have dropped after spiking in 2008 and Mr Trichet indicated that a lack of visibility on future price trends was one reason for the ECB’s pause in interest rate movements this month.
“Nobody knows what is likely to be the evolution of oil and commodities, and that is something that we have to take into account,” he said, adding that he hoped food and energy prices would remain at a low level because it was an appropriate “automatic stabiliser” for the economy.
The ECB cautioned highly indebted governments that have assumed large contingent liabilities relating to banking sector guarantees and cash injections, which would include Ireland, that they must make a “credible commitment to medium-term budgetary objectives as soon as possible” in order to restore public confidence in the sustainability of public finances.
“As soon as possible means fixing up, in liaison with the Commission of course, the appropriate medium-term target and a credible base for reaching the medium-term target, in order precisely to restore confidence, to consolidate confidence – that is essential,” Mr Trichet later explained.
Governments need to fully understand that they must have the commitment and determination to help their own households, he added, although he qualified this by saying some economies had “less room to manoeuvre” than others.
In 2009, some seven euro zone countries, including Ireland, are expected to have budget deficits that breach the 3 per cent of GDP limit specified by the EU Stability and Growth Pact.
However, Mr Trichet said he did not envisage any situation whereby the International Monetary Fund would have to step in and provide loans to any EU country, as it did in the case of Iceland.
