The European Central Bank (ECB) has cut interest rates for the second time in four months as headline inflation across the euro area continues to moderate.
The Frankfurt-based central bank trimmed its key lending rate, the one that affects mortgage rates, by 25 basis points to 4 per cent. It had been at a record high of 4.5 per cent before June.
“Based on the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to take another step in moderating the degree of monetary policy restriction,” the ECB said.
The bank, however, warned the fight against inflation was far from over, noting price pressures remained, particularly in the services sector, where wages are rising rapidly. “Domestic inflation remains high as wages are still rising at an elevated pace,” it warned.
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What does the expected ECB interest rate cut mean for Irish mortgage holders?
The quarter-point reduction will reduce the monthly repayments on every €100,000 of tracker mortgage debt by €12 to €13. That means the average tracker customer with €200,000 remaining over 10 or 15 years will save around €25 a month.
Tracker mortgage holders are also expected to benefit from bank’s move to cut the spread between its refinancing and deposit rates by 0.35 per cent later this month.
This will potentially increase the savings for tracker holders with €200,000 left on their mortgage to €70 a month or €840 a year.
The ECB confirmed its main refinancing rate would be decreased to 3.65 per cent from September 18th. AIB said it would apply tracker mortgage rate adjustments in line with ECB policy and its contractual obligations to customers.
Focus will now shift to ECB president Christine Lagarde’s post-meeting comments and the outlook for interest rates in general with markets pricing in at least one more rate reduction before Christmas.
In its statement, the ECB said it remained determined to ensure that inflation returns to its 2 per cent medium-term target and would keep policy rates “sufficiently restrictive for as long as necessary to achieve this aim”.
It said it would not pre-commit “to a particular rate path” and that all future rate decisions would “continue to follow a data-dependent and meeting-by-meeting approach”.
While it sees inflation across the bloc averaging 2.5 per cent this year, falling to 2.2 per cent in 2025 and below its 2 per cent target level in 2026, it warned that price growth was expected to temporarily rise again in the latter part of this year, “partly because previous sharp falls in energy prices will drop out of the annual rates”.
The bank also revised up its projections for core inflation, which strips out volatile food and energy prices, in 2024 and 2025 noting services inflation had been higher than expected.
While domestic inflation was still too high on account of strong wage growth “labour cost pressures are moderating, and profits are partially buffering the impact of higher wages on inflation,” it said.
It said financing conditions across Europe remain restrictive with economic activity “still subdued, reflecting weak private consumption and investment.” It projected the euro zone economy would grow by 0.8 per cent in 2024, rising to 1.3 per cent in 2025 and 1.5 per cent in 2026.
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