ECB interest rates set to remain at record lows

INTEREST rates are likely to remain at a record low for the coming months and may even fall further.

The European Central Bank (ECB) left rates on hold for the second consecutive month yesterday and president Jean-Claude Trichet refused to rule out further rate cuts in the coming months.

He said the current rates are appropriate but added that the governing council “did not decide...that this was the lowest level we would attain under any circumstances”.

Mr Trichet traditionally uses the word “appropriate” to signal there’s no imminent plan to change rates and said yesterday’s decision by the 22-member Governing Council was unanimous.

Ulster Bank economist Simon Barry said it was clear from the update that rates are not likely to be raised anytime soon.

“The ECB clearly remains quite cautious on the economy’s outlook, with Trichet repeating his view from last month that it may be the middle of next year before the economy sees a return to positive quarterly growth rates,” he said.

Mr Barry said the next move in official interest rates is more than likely going to be a hike and this increase will probably happen well into 2010.

The ECB has reduced its main rate by 325 basis points to 1% since October, resulting in hundreds of euro of savings for mortgage holders.

Director of the Irish Mortgage Corporation Frank Conway said it is no surprise that the ECB has not moved on rates.

“The general consensus among some of the most influential members is that the cycle of interest rate cuts has reached its maximum limit, particularly in light of the fact that the extraordinary cuts to date have not made a significant difference to the various economies,” he said.

Associate director of Financial Engineering James Maguire said now would be a good time to look at fixed rate options.

“You can avail of a five year fixed rate as low as 3.3%. People only normally react to fixed rates when the rates start to increase,” he said.

A Bloomberg survey of economists showed the ECB may keep its benchmark rate at the current level until the fourth quarter of 2010.

Mr Trichet said activity is likely to remain weak but should decline less strongly than was the case in the first quarter.

Royal Bank of Scotland economist Silvio Peruzzo said, however, that the ECB could eventually cut again if renewed economic weakness or signs of deflation were to materialise.