Irish Permanent, First Active and Tusa have become the first financial institutions to cut mortgage rates in response to the surprise decision by the European Central Bank (ECB) to reduce its key interest rate to 4.5 per cent.
Irish Permanent, the Republic's largest mortgage lender, has cut its variable rate to 5.89 per cent from 6.14 per cent, resulting in a monthly saving of £14.83 on a £100,000 20-year mortgage. The cut will come into effect on June 1st. First Active's variable mortgage rate has been reduced to 5.88 per cent from 6.13 per cent, with effect from Monday.
Meanwhile Tusa, the joint banking venture between Superquinn and TSB, is passing on a 0.3 percentage point reduction to its customers, larger than the ECB cut. It is cutting its standard variable rate from 5.6 per cent to 5.3 per cent with effect from May 25th.
Other lending institutions said they would be reviewing their lending and deposit rates over the coming days. ECB president Mr Wim Duisenberg said its decision was prompted by new evidence that inflation is falling. But market analysts believe the move was a response to evidence that the German economy, which accounts for one-third of the euro-zone's GDP, is in trouble.
The euro rose briefly after the announcement yesterday afternoon but soon fell back to a three-week low against the dollar. Currency experts said that the rate cut, which some described as "too little, too late", represented a sharp U-turn on the part of the ECB that could damage its credibility.
Yesterday's cut, which is only the second since the ECB was established in 1998, brings the main euro-zone interest rate to 4.5 per cent, the same level as in the US. Speaking in Frankfurt after a meeting of the ECB's Governing Council, Mr Duisenberg defended the move as the right action to ensure low inflation and strong growth in the euro-zone.
"On the basis of the information available, this is the appropriate level of interest rates to ensure that the euro-area economy will be able to maintain price stability and thereby to contribute to sound economic growth over the coming years," he said.
Less than two weeks ago, Mr Duisenberg told a meeting of the International Monetary Fund and the World Bank in Washington that cutting rates now would undermine the ECB's credibility. The Bank has come under enormous pressure, especially from the US, to cut rates in an effort to boost economic growth in the euro-zone.
Figures released this week showed that German industrial production and factory orders declined sharply in March and that unemployment had risen for the fourth month in a row. Mr Duisenberg yesterday dismissed the figures as "anecdotal evidence" and denied that yesterday's surprise move would damage the ECB's credibility. "It is not our intention to surprise markets but sometimes it is unavoidable," he said.
Euro-zone inflation, at 2.6 per cent, remains well above the ECB's target of 2 per cent. But Mr Duisenberg said all indications suggested that inflation would be below 2 per cent by the end of this year.
He admitted that the bank's statistics had been overestimating the growth of money supply in the euro-zone - a key indicator of price stability. He said that, contrary to earlier pronouncements, money supply growth had probably been below the ECB's target figure for some months.
Analysts were uncertain last night as to whether yesterday's move would be followed by further cuts in the next few weeks. But few expect the ECB to follow the dramatic example of the US Federal Reserve, which has cut rates by 1.5 per cent since the start of this year.
The Bank of England also cut interest rates by 0.25 per cent yesterday, leaving its main rate at 5.25 per cent. The US Fed is expected to cut its rates by a further 0.5 per cent next week.
The ECB move may have implications for the deposit rates attached to Special Savings Incentive Scheme (SSIS) accounts, many of which are tied to the ECB rate. According to an ACC Bank spokeswoman, the rate attached to its variable SSIS deposit account will fall to 4.5 per cent from 4.75 per cent.
