ECB cuts a boost for borrowers

COMMERCIAL borrowers and the country’s 777,321 residential mortgage holders could be in line for significant savings, as economists across Europe predict and recommend that the European Central Bank cuts interest rates by a third.

The ECB shadow council, a group of 15 economists and portfolio managers who watch economic developments and monetary policy in the euro region and issue recommendations each month, wants the ECB to reverse its two benchmark rate hikes in 2011 and cut the rate from 1.5% to 1%.

A cut to 1%, if passed on by the banks, would cut €60 a month off repayments on a €200,000 home loan (€720 a year). While the ECB shadow council make recommendations, a number of economists are predicting that the ECB will cut rates in 2012.

Goodbody Stockbrokers’ chief economist Dermot O’Leary said yesterday they are changing their ECB rate call and now expect the recent rate increases to be reversed in 2012. “Our end-2012 call is now 1%.”

Shadow council member Marie Diron, senior economist at Oxford Economics in London, said: “The ECB needs to consider the possibility of reversing the two interest-rate increases implemented earlier this year. Should the growth outlook worsen, the ECB may need to lower interest rates below 1%, given the impossibility of fiscal stimulus,” she added.

Senior European economist at Capital Economics Ltd, Jennifer McKeown, said: “The chance of further interest-rate hikes has evaporated and a reversal of earlier increases now seems more likely. We have pencilled in 25 basis-point interest rate cuts in December and March.”

ECB President Jean-Claude Trichet signalled this week the bank may revise its assessment that inflation risks are on the upside, paving the way for a halt in its policy tightening. ECB policy makers meet next Thursday to decide on interest rates.

- Additional reporting Bloomberg.