If there had been any doubt that the European Central Bank (ECB) was going to start cutting interest rates at next week’s meeting it has been ended by a series of comments from members of its governing council. Despite indications that US and UK interest rates cuts will be delayed, the ECB is clearly ready to move. Irish mortgage holders – particularly those on tracker mortgages who have felt the full impact of the increases – will get some relief. And the likelihood is that there will be more reductions to come.
However, the outlook later this year is still uncertain. In an interview with the Financial Times, the ECB chief economist, Philip Lane, cautioned that " things will be bumpy, things will be gradual.” What he means is that the pace at which interest rates will fall remains uncertain and that much will depend on the trend in inflation.
The ECB now has significant room for manoeuvre. It has increased interest rates to record highs and thus can now reduce them by a significant amount, while still continuing to fight inflation. This should give the members of its governing council some comfort as they act in response to evidence that the rate of inflation is moving back to the 2 per cent target level. Monetary policy operates with long lags and so there is an element of art, as well as science, in deciding when to move and by how much. However, all the signs are that the ECB will reduce its key borrowing costs by 0.25 of a percentage point next week.
Tracker mortgage rates will fall immediately and the prospect of lower borrowing costs, along with competitive forces, have already led to some reduction in the fixed rates on offer to new borrowers and those whose current fixed term is running out. Nonetheless, for many coming off fixed mortgage rate contracts, the interest rates they will move on to will be significantly higher. In turn, this raises the risk of some running into difficulties keeping up repayments and falling into mortgage arrears. There has already been evidence of some rise in short-term arrears, though so far it has been limited.
Markets in Vienna or Christmas at The Shelbourne? 10 holiday escapes over the festive season
Ciara Mageean: ‘I just felt numb. It wasn’t even sadness, it was just emptiness’
Stealth sackings: why do employers fire staff for minor misdemeanours?
Carl and Gerty Cori: a Nobel Prizewinning husband and wife team
Banks must be ready to deal with this and the Central Bank needs to ensure that the code of practice for dealing with arrears is adhered to and that customers are given full information about their options. It also underlines the importance of the prudential rules which limit the amount borrowed in relation to income and oblige the banks to " stress test” loans.
In time there should be a further general downward move in interest rates. However, as the banks did not increase most rates to compensate fully for ECB increases, the scope for further downward movement in many fixed rates may be limited enough for now. The deals on offer to borrowers will not return to the levels seen before 2022. But it is time for the ECB to make the first move and start reducing borrowing costs.