The European Central Bank’s move to cut interest rates by a further quarter point coincided with the publication of new figures underlining the difficult balancing act it faces. The euro zone economy has stagnated, showing no growth in the final quarter and activity in Germany and France declined. The ECB’s primary role is to control inflation, but it is also mandated with taking account of wider economic decisions.
Assuming the rate of inflation continues to fall, interest rates will fall further this year. Were inflation to remain stuck above its 2 per cent target, its decisions will get a bit more difficult. A weak EU economy will reduce demand pressures, but a lot of other factors are also in play, including the possibility of a trade war and swings in the value of the euro against the US dollar.
The ECB’s key deposit rate stands at 2.75 per cent after yesterday’s reduction. This is still at a level that would be seen as restrictive, in other words high enough to keep inflation in check. Debate may grow in the ECB’s governing council as rates approach a more neutral level.
Further cuts appears likely to be justified. But the entire burden of boosting euro zone growth should not fall on the ECB. The European Commission has produced plans to spur growth, but turning these into action is the challenge.
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Irish mortgage lenders have already reacted to the declining trend by reducing the fixed rate on offer to borrowers, while tracker rates have also fallen. There remains a big spread of interest rates on offer to those who are coming off existing fixed rate deals. They would be well advised to check what is on offer as costs differ now depending on the size of the mortgage, the BER rating of the property and other factors.
The fall in borrowing costs, while welcome for borrowers, is also likely to underpin the rise in house prices. With recent worrying signs about the slow pace of housing supply – and election claims that 40,000 houses were completed last year now shown to have been nonsense – there is much work here for the new Government.
