Writing on wall for super-low interest rates

First the good news. The European Central Bank has signalled that its key interest rate will remain at zero until after the summer of next year. So the regime of rock-bottom interest rates which has benefited Irish borrowers is set to continue well into 2019, with many analysts saying interest rates will not rise until December 2019 or early 2020.

Those with tracker mortgages will continue to benefit from extraordinarily low rates, while borrowers on standard variable rates should not see any increase either. Competition for new borrowers will continue. The low interest rate party has another while to run.

How quickly euro zone rates will increase will depend on whether euro zone growth and inflation pick up, as the ECB continues to expect. If growth and inflation do pick up, then the ECB will start moving interest rates away from current emergency levels sometime towards the back end of next year. But with threatened trade wars with the US and political uncertainty in Italy, there are dangers and uncertainties.

ECB president Mario Draghi said rates would remain where they were "through the summer" of next year, using the type of imprecise language which central bankers like, as it gives them some flexibility. Still, this was a bit longer than many in the market had expected and suggests a delicate compromise in the ECB's governing council between those, led by Germany, looking for an end to emergency measures and those who believe that the euro zone economy is not yet out of the woods.

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Hawks

As a nod to the monetary hawks, the ECB has given a clear indication that it will end the other part of its emergency medicine – its massive programme of buying bonds, mainly issued by governments – by the end of this year.

It has bought some €2.4 trillion of bonds since the programme started in 2015. It will halve monthly purchases to €15 billion after September and plans to phase the programme out by the end of the year, provided economic indicators are moving as it expects.

The ECB’s low interest rate regime and bond purchases has been a huge support to the Irish exchequer, allowing the Government to borrow money at rock-bottom interest rates. Nobody is quite sure what will happen to bond interest rates when the ECB support ends, but the only way to go is up. Like households, the Government needs to realise that the era of super-low interest rates is ever-so-slowly drawing to a close.