ECB will hold interest rates for at least a year, says expert panel

IT could be 2014 before the European Central Bank (ECB) raises rates again, according to an Irish Examiner survey.

All experts surveyed, which included top economists and property analysts, believe that the ECB will not increase rates again this year, with some saying that rates could even fall. Others believe, however, that the ECB can not be seen to cut rates so soon after two hikes.

National Irish Bank chief economist Ronnie O’Toole said the next rise could be 2013 or as late as 2014 while Ian Kernohan, an economist with Royal London, expects the ECB to keep rates on hold until 2013.

Chief economist with Bloxham, Alan McQuaid, said he believes the ECB’s bias is still towards further monetary tightening. Given the slowdown in the eurozone economy, however, he doesn’t expect any more interest rate increases this year. He said serious questions would be raised about the ECB’s credibility if they were to lower rates, having already hiked twice this year.

Chief economist with KBC Bank, Austin Hughes, said that the ECB may wait some “significant time” before raising rates again.

“Any near-term change in ECB rates is far more likely to be a cut than an increase, but the ECB will be very reluctant to ease policy — even though it might be appropriate,” he said.

“A decent case could be made for no further interest rate increases until late next year or even 2013, but many at the ECB feel that the current level of rates is far too low for comfort. So they will be keen to return rates to more ‘normal’ levels as soon as possible.”

Operations manager with Irish Mortgage Brokers, Karl Deeter, said the bank seems “done for now” on the rates front, while director of the Irish Mortgage Corporation, Frank Conway, said the best course of action is for the ECB to take a breather from further rate increases at least until the current period of economic uncertainty ends.

A halt to rates increases would be welcome news for holders of tracker mortgages, according to Ciaran Phelan, chief executive of the Irish Brokers Association, as trackers are directly linked to ECB rates.

“Those on standard variable rates may not be so lucky as banks here try to recoup losses and rebuild their balance sheets,” he said.

Joan Henry, head of research at Savills Ireland, believes that the ECB was “too aggressive” in raising rates this year.

She said the bank faces a serious dilemma in terms of credibility, as it is now apparent that it increased interest rates too aggressively in 2011 to the current rate of 1.5%.

“A rate of 1.5% is just too high, given the fragile economic growth and funding issues being faced by eurozone countries. 1.5% is also too high relative to the US and UK base rates, which have not been increased,” Ms Henry said.

Managing director at the Independent Trustee Company, Aidan McLoughlin, said that, in normal circumstances, it is easy to predict the likely direction of interest rates by looking at the trend in inflation, but the euro area is not operating in normal circumstances.

“Given the real danger of a double dip recession it is possible the ECB may be swayed towards a more benign policy on interest rates,” he said.

Director of PIBA Mortgage Services, Rachel Doyle, said: “The ECB rate should be less than 1%, given market conditions, instead of the current 1.5%.”

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