Another cut in European Central Bank (ECB) interest rates looks to be on the cards next week – and, as the euro zone economy weakens, more could be on the way.
This has important implications for borrowers, the housing market and the wider economy.
The ECB has already cut interest rates twice in June and September, and while it was non-committal about future reductions at the time of its last reduction, “the incoming news since then indicates that the case for a further easing of the policy stance is clearly building,” said economist Simon Barry.
The euro zone economy is weak, especially the manufacturing sector, Barry said, and the headline rate of inflation in September was 1.8 per cent, below the ECB’s 2 per cent target. As of now, market analysts expect a cut next week.
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Borrowers cash in
The downward trend in ECB rates has knocked on automatically to tracker mortgage holders and is leading to an inching down of borrowing costs in general.
Tracker holders received an additional boost from a 0.35 percentage point cut following a change in the way the ECB sets its different interest rates.
Taking into account the two ECB cuts to date and this technical adjustment, tracker holders by this month should see a 0.85-point cut – worth around €50 a month in savings on a typical tracker balance of around €130,000. By the end of the year monthly savings could be €80 or more, with more cuts on the way.
The mainstream lenders have adjusted their fixed rates, edging them down as they jockey for market share. However, mortgage broker Michael Dowling points out that fixed interest rates only rose by 1.75 percentage points as ECB rates rose by 4.5 points between June 2022 and October 2023. Therefore, there is limited scope for reductions in some of these offers.
Borrowers need to tread carefully as a big gap has opened up in rates across the market. Not only are there differences between different lenders, but also some big gaps within banks themselves.
AIB, for example, offers a five-year fixed green rate – for building energy ratings (Ber) of B3 or better – of as low as 3.2 per cent, though its fixed rates for three to five years on properties with poorer Ber are over 4.7 per cent, which looks costly.
Some borrowers who do not qualify for cheaper green rates have thus chosen to stay on a variable rate for now. There are also other options, for example with Avant, which offers fixed rates without any Ber rules of a little over 3 per cent. Borrowers need to do their homework and take professional advice.
More people may have the option of locking in at or close to 3 per cent as interest rates fall over the next 12 to 15 months, according to Dowling, which would be a good strategy.
One group who will particularly hope for reductions are those whose loans were sold to funds by the banking groups after the crash. Many have been charged rates of up to 8 to 9 per cent and some complain that reductions have been slow to emerge from ECB cuts so far.
The housing market
House prices have surged again in recent months, with the latest CSO figures showing prices rising at an annual rate of 9.6 per cent in July.
Having slowed sharply up to last autumn, partly due to the sharp rise in interest rates, house price growth has accelerated since in another unwelcome upward twist. Now falling interest rates will add to demand in the market by making lending a bit cheaper and with supply still lagging way behind.
Broker John Fahy of Pangea Mortgages says that average growth of 10 per cent in prices is now on the cards this year and something similar could be repeated in 2025 “as high wage growth, Government stimulus, strong population growth and falling interest rates combine to make a turbocharged demand side of the property market.”
He points out that the growth of new lending products, particularly equity release offers aimed generally at older borrowers, will also help sustain demand, as well as the Bank of Mam and Dad, now used by close to four in 10 borrowers.
The economy
Lower interest rates will be welcome for borrowers. But the wider economy – already operating at full capacity and due to get a boost from budget cash over the next few months – does not need them. Ibec chief economist Ger Brady estimates that the budget boost, if spent by households, would add a hefty 5 per cent to consumer demand in the final quarter of this year. Some of the money, of course, will be saved, but better-off households are likely to boost their discretionary spending, based on the “double double” child benefit payments and energy credits.
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Meanwhile, lower interest rates will also put more cash in some pockets. There are about 130,000 tracker mortgage holders left in the market – those loans were taken out before 2008 as they were no longer available after the crash. With a boost to annual household income of close to €1,000 a year likely by the end of the year on average, and more in prospect in 2025, their spending power is rising too, while the general fall in borrowing costs will have a wider impact.
Finally, while households lost out though higher inflation over recent years, wages rose by close to 6 per cent in the first half of the year, according to Central Statistics Office (CSO) data and so real earnings are now on the rise again.
Meanwhile, the jobs market remains strong. Central Bank governor Gabriel Makhlouf warned this week that the expansionary budget added “unnecessary stimulus to an economy at full employment”.
Ironically ECB policy – set on the basis of the big euro zone economies – may add some further fuel to this fire.
