By Eamon Quinn
Comments by ECB chief economist over the steep path inflation still has to take may mean mortgage rates here stay lower for longer, an economist has said.
Merrion Capital chief economist Alan McQuaid said the ECB may have to delay increasing key interest rates until early 2020, almost a year later than the markets once believed. The ECB’s Peter Praet said the eurozone may have more unexploited capacity, particularly in the labour market, which could mean that inflation might take longer to rise back to its near 2% target.
The comments may reflect the debate inside the ECB about the timing of ending its huge monthly bond- buying, or quantitative easing programme and in turn about when the Central Bank will start raising rates. Eurozone futures contracts predict the ECB will start raising rates late next year which is much later than the contracts were projecting only a few months ago.
Mr McQuaid said it’s now possible the ECB will only sanction a quarter-point rise in early 2020, a prospect that would lift the threat over the finances of many indebted Irish households.
Investec Ireland chief economist Philip O’Sullivan said the bank predicts two modest interest rate rises next year. The comments by Mr Praet led to falls in some eurozone government yields.
Portugal’s 10-year bond yield fell to a seven-week low, while Italian yields were at their lowest in around five weeks.
Peripheral government bonds are among the biggest beneficiaries of the ECB’s largesse and any sense the bank may prove more cautious than expected in ending quantitative easing or raising rates tends to benefit these markets.
Mr Praet’s comments echo remarks by other ECB policymakers including its chief Mario Draghi earlier this week.
“It’s clear they are heading for the exit on quantitative easing but the discussion of them ending [bond] purchases in September is becoming less likely,” said Marchel Alexandrovich, senior European economist at Jefferies.