The European Central Bank’s pivot on interest rates is almost complete. It has not always been a convincing journey, due in large part to differences of opinion on the ECB governing council. However, with inflationary pressures easing fast, the first move downwards in borrowing costs is now not far off. It could happen as early as April, but the June meeting of the ECB looks more likely. More importantly, once interest rates start falling, the likelihood is that they will decline in a series of steps as this year goes on and into 2025.
Inflation has still not fallen all the way to the ECB’s 2 per cent target. But interest rates have risen so significantly – by a total of 4.5 percentage points – that the central bank has scope to reduce them quite a bit before they reach what might be judged to be a neutral level, neither stimulating nor holding back the euro zone economy.
For Irish borrowers , the downward trend in interest rates will be welcome. Those on tracker mortgage interest rates, in particular, have been hit hard. As their interest rates are linked directly to ECB rates, they will be first to benefit. A technical change to the way the ECB sets its interest rates will mean they should get an additional cut in the Autumn of 0.35 of a percentage point. Tracker rates could well be one point or more lower by the end of this year.
The downward trend in interest rates has implications for Ireland. On balance it will be good for economic growth over the next year or two, but in the short term the impact will be limited . This is because tens of thousands of borrowers moving off fixed interest rates taken out when ECB rates were at rock bottom levels will face much higher repayments. The interest rates on offer to these borrowers should edge lower, but will remain much higher than the cost of their existing loans.
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The banks and the regulator, the Central Bank, need to be ready to assist those in difficultly with repayments – and there will be some. While mortgage rules mean borrowers are not as exposed as they were before the financial crash, most still bought at relatively high prices and will face significant rises in monthly repayments.
Competition in the mortgage market is patchy but may be enough to encourage a fall in the interest rates on offer on new mortgages as ECB rates decline. These rates did not rise as much as ECB rates did, so their downward path is uncertain. The departure of KBC and Ulster Bank has left the two big banks – AIB and Bank of Ireland – facing just Permanent TSB and a string of smaller players in competing for business. Certainly some fixed rate offers of close to 5 per cent will look high as ECB rates fall – and should be reduced sooner rather than later.
Having been among the most expensive in the euro zone, Irish mortgage rates are now at more average levels. They need to stay there.