ECB surprises markets with 0.25% cut

THE European Central Bank (ECB) surprised the markets yesterday by cutting interest rates less than expected in a cautious move.

Analysts had widely expected the ECB to cut rates by 0.5% to 1% but instead it cut them by just 0.25%.

Rates look set to fall further next month after the bank signalled more cuts will follow.

The cautious move sparked rumours of a split on the governing council.

KBC economist Austin Hughes said: “It could be the case that divisions within the ECB governing council are widening. One set of divisions could reflect differences in opinions in regard to the severity of the downturn as well as more substantive differences as to how aggressively the ECB’s response should be given that its orientation is on medium-term rather than short-term developments.”

President of the ECB Jean-Claude Trichet said he would not exclude that the bank could “in a very measured way” go down from the present level.

It is the sixth time the ECB has lowered its key rate since October 2008, when it stood at 4.25%.

For homeowners on a e300,000 tracker rate mortgage the quarter-point reduction will cut about e39 off the monthly repayment and means that mortgage costs since September have now fallen by about e509 a month.

For those on e100,000 standard variable rate (SVR) mortgage the cut will mean monthly savings of almost e14, bringing to e178 the savings since September.

The US Federal Reserve, the Bank of England and the Bank of Japan have cut their key rates to almost zero.

Bank of Ireland, AIB, ICS Building Society, permanent tsb, Halifax, Bank of Scotland (Ireland), National Irish Bank and EBS will pass on the 0.25% ECB rate cut to all variable rate mortgages and tracker mortgages.

In the past month, four ECB policymakers suggested offering banks longer-term loans to ease credit strains. The ECB lends banks as much cash as they need for periods of up to six months.

Mr Trichet said the bank is looking at “optimising what could be done and should be done to enhance credit support”.

Director with the Irish Mortgage Corporation, Frank Conway said: “The ECB came through its first 10 years taking very controlled and measured interest rate changes. Periods of increases and decreases lasted for several years. In the space of just six months, the ECB has nearly exhausted orthodox monetary policy. The question is whether or not the council will switch to unorthodox monetary measures such as quantitative easing.”

Meanwhile, Bank of Ireland up the ante in its push for first-time buyers by cutting its one-year fixed rate to 2.35%.