Major ECB rate cut draws approval

There has been a broad welcome for today’s interest rate cut of 75 basis points by the European Central Bank (ECB).

The reduction, the bank’s biggest ever move, comes as inflation plummets and the euro zone economy sinks deeper into recession. The ECB's main refinancing rate is now at 2.50 per cent, its lowest in nearly two-and-a-half years following the cut, the third in barely two months.

Labour Party deputy leader Joan Burton welcomed the cut but said she was concerned at reports the financial institutions may not pass on the cut in full.

“The ECB is doing its bit to promote economic recovery and we now need to see the banks and the financial institutions being more co-operative in this regard,” Ms Burton said.

“The benefits of this cut should not be used to expand the profits of the banks but the ease the burden on small companies struggling with overdrafts or families who face the threat of repossessions,” said the party’s spokeswoman on finance.

Marian Finnegan, chief economist with Sherry FitzGerald, said the cut was “a more aggressive move” compared to previous rate decisions “which could be considered conservative”.

“A 75 bps cut effectively brings interest rates back to level not seen since early 2006, a factor which will positively enhance the affordability of all forms of property financing,” Ms Finnegan said.

“The combination of this rate cut and the recent reductions in the price of residential property, of up to 30 per cent, bodes well for the re-alignment and reactivation of the residential market in the months ahead.”

Ms Finnegan said it would be early 2009 before the cut’s impact would be visible in the market.

Frank Conway, director of the Irish Mortgage Corporation, said today's announcement was “a very welcome gift” from the European Central Bank. “For some, today’s announcement will provide enormous help during an increasingly difficult economy” said Mr Conway.

“On a €300,000 tracker mortgage (1 per cent over ECB), 30-year term, today’s rate cut will reduce the monthly repayment by about €129. Since September, monthly repayments on that same mortgage have been slashed by almost €310,” he said.

The Construction Industry Federation (CIF) said the ECB move was an “important confidence boost” for the Irish economy. CIF director general Tom Parlon also urged banks to set up a fund to help homeowners meet repayments if they lost their jobs.

Mr Parlon said: “The creation of a fund along the lines announced today by Gordon Browne in Britain to support homeowners who lose their jobs would give an important confidence boost.

“The fund, which should be established by the banks, would safeguard householders against repossession for a period of up to two years. Certain criteria would have to be satisfied before people could avail of the fund,” Mr Parlon said.

“The longer we wait to recapitalise the banks the more difficult the challenges will become,” he added.

The Irish Small & Medium Enterprises’ Association (Isme) also called for today's cut to be passed on by the banks.

Isme head of research Jim Curran said: “Today’s decision by the ECB should bring badly needed relief to many smaller businesses. . . . The benefit will only be apparent, however, if the lending institutions pass on the benefit in full to their customers.

“Any of the banks that refuse to pass on the benefit in full should face serious sanctions, including a withdrawal of the government guarantee scheme,” Mr Curran said. “The Government must instruct the Financial Regulator to monitor the banks and name and shame any institutions that are not complying.”

The majority of economists had expected a smaller, 50 basis point, although markets had priced in a 75 basis points reduction.

"They are now taking bolder decisions and this reflects a shift in perception in the ECB," said Bank of America economist Gilles Moec."

Eurogroup Chairman Jean-Claude Juncker applauded the ECB move. “The decision taken by the ECB is good. The ECB is delivering an excellent job," he said. Mr Juncker added he did not think there was a risk of deflation in the 15-country euro zone.

Until today, the ECB had restricted itself to two 50-point cuts since October, with ECB President Jean-Claude Trichet stressing its role as an anchor of stability.

The Bank of England today cut rates by 100 basis points to 2 per cent, their lowest level since 1951.