Mortgage holders had become used to regular reductions in interest rates as the European Central Bank unwound the increases necessary to control inflation, which had spiked following the Russian invasion of Ukraine. Now it appears that this process may be close to, or at, an end.
For the second meeting in a row, the ECB held interest rates steady yesterday. The outlook, in a turbulent world, is by necessity uncertain. As ECB president Christine Lagarde has said, the central bank’s current approach is to “watch and wait.”
This involves observing the economic data, which is now heavily influenced by political uncertainty, relating in part to the EU trade deal with the US. The rise in French borrowing costs will also be in the ECB’s sights. With its benchmark interest rate at 2 per cent, the central bank will feel that its policy is roughly in neutral territory, neither stimulating nor restraining the economy, and so it can afford to sit and wait.
There are important messages here for Irish borrowers and lenders. Interest rates are not going back to where they were for years in the lead up to the inflationary crisis, unless the euro zone economy faces an unexpected collapse. Mortgage holders may hope for one more reduction – which might happen. But around current levels is as good as it is going to get for borrowers.
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Banks are competing for new business and this has led to reasonably priced loans in many areas of the market. But some of the interest rates on offer to either new borrowers or those who fixed rate terms are ending remain out of line. They have fallen, but the margin in some cases over ECB rates remains too high .
And the burden on some borrowers who had their loans sold to investment funds is even higher. These borrowers were promised by the authorities that they would not be at a disadvantage as a result. But in reality many are and – while some efforts have been made to help – they continue to pay an unacceptable prices for loan sales forced on banks by regulators.
