More rate cuts are on the way?
We can’t say for sure but it looks like the European Central Bank (ECB) will cut its main rate by quarter of a per cent at 1.15pm on Thursday.
That’s the second cut in just a few months, what’s going on?
It’s all about inflation. ECB monetary policy has a long-standing goal of keeping inflation at 2 per cent and one of the few levers it has to reach that goal are the interest rates it sets. For more than a decade, inflation across the euro zone was essentially non-existent and that meant interest rates were zero and sometimes less than zero.
Then the pandemic ended and demand spiked, prompting prices to climb throughout the supply chain. Then the cost-of-living crisis hit, Russia invaded Ukraine and inflation went through the roof, flirting with double digits across the euro zone for many months.
The ECB kept increasing its rates – on 10 occasions – reaching a peak of 4.5 per cent. But over the last year inflation has moderated and is now less than 3 per cent. With economic growth in the EU sluggish, rates are going in the opposite direction again.
That is good news, isn’t it?
It is pretty good news for the tens of thousands of people with tracker mortgages who will see the benefit of any rate cut almost immediately.
What kind of benefit are we talking about?
A 0.25 per cent cut will bring the refinancing rate to 4 per cent and see the average tracker mortgage holder’s repayments fall by €13 for every €100,000 they owe. To save you doing the maths, that means if someone owes €250,000, the cut will be worth about €33 a month or just under €400 a year.
And that comes on top of the cut earlier in the summer?
That’s right. The ECB cut the rate by a quarter of a point in June.
Will there be more cuts?
The ECB likes to keep its cards close to its chest but there is speculation that there might be another rate cut in December – as long as inflation doesn’t lose the run of itself again.
So, three cuts in six months?
Actually, there is going to be a fourth bonus cut. As a result of an “operational framework review” carried out by the ECB in March it is cutting the spread between the bank’s refinancing and deposit rates to 0.15 per cent. Right now the difference is 0.5 per cent, which means the refinancing rate, on which tracker mortgages are based, is going to fall by 0.35 per cent this month.
What does that mean for tracker holders?
If we add the potential 0.25 per cent cut to the 0.35 per cent cut, the savings per €100,000 owed on a tracker with 15 years left to pay is €31. The savings for the person with a €250,000 mortgage outstanding climbs to €77. If we were to add that to the savings resulting from the June cut, a person owing €250,000 will be better off by €110 a month or €1,320 over the course of a year.
That sounds great, at least for the tracker holders?
It is but it needs to be looked at in context and tracker mortgage holders are still paying far more than they were just over two years ago. Even with the three cuts outlined here, monthly mortgage repayments are about €400 more than they were in 2022.
And what about non-tracker holders?
Finally a question about the majority! While tracker mortgage holders tend to be front and centre when ECB hikes or cuts come round, most people don’t have them. There is a hope that successive cuts will see fixed and variable rates fall. Before the ECB drop in June, the main banks in Ireland had already decreased rates by up to 1 per cent in May so the cuts were anticipated and priced into the market in advance.
“We may see some lenders at the higher end of the market reduce their rates, and pillar banks making adjustments to remain competitive, [but] it’s unlikely that rates will return to the low sub-2 per cent levels seen just over two years ago,” said Martina Hennessy of online mortgage brokers dodle.ie.
What should I do if I have a mortgage?
“For those who locked into fixed rates before 2022 and are now facing a very different rate environment, it’s crucial to seek market-based advice,” Hennessy said.
“Simply accepting the first rate offered by your current lender could cost you more in the long run. By reviewing the market, you could secure significant savings on your mortgage.”
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