Mortgage boost with rate cut on the cards

AN interest rate cut could be on the cards for early next year resulting in lower mortgage repayments for many homeowners.

The ECB kept interest rates on hold yesterday at 1.5%, which was expected, given that it was European Central Bank (ECB) president Jean-Claude Trichet’s final meeting as head. Italy’s Central Bank governor will take over the post next month.

Mr Trichet said yesterday the “credibility of Ireland is visibly improving.” He added the ECB has “been very, very forthcoming” in helping Ireland.

Meanwhile, it is expected inflation will stay elevated over the coming months and then fall which could indicate the need for an interest rate cut in the coming months.

Berenberg Bank economist Holger Schmieding said: “The ECB is now likely to prepare an interest rate cut within the next four months, by March at the latest.

“Trichet will try to make it easy for Draghi by making it clear that rates will be cut if economic indicators worsen so that Draghi will not have to announce anything new. It would be uncomfortable for Draghi, especially being Italian, having to announce a surprise at his first meeting,” he added.

The ECB also sees “intensified” threats to the eurozone economy and according to Mr Trichet it will provide struggling banks with longer-term liquidity.

“The economic outlook remains subject to particularly high uncertainty and intensified downside risks,” Mr Trichet said.

The bank announced yesterday that it is going to offer new emergency loans to the eurozone banks.

The ECB has unveiled a €40 billion liquidity support package to shore up the eurozone economy. The package will see the ECB spend the money on covered bonds, buying debt in the primary and secondary markets.

Also the Bank of England announced it was injecting £75bn (€86bn) more new money into the British economy.

Mr Trichet banks should to do “all that is necessary” to reinforce balance sheets and, where necessary, they should take full advantage of government support measures which should be made fully operational.

The International Monetary Fund (IMF) yesterday supported the steps by the ECB to expand liquidity while recommending consideration of more interest rate cuts by the central bank.

“We share the ECB’s concern that there are severe downside risks to the outlook as the result of financial tensions and thus we fully support the liquidity extension announced today.

“With the outlook risks persisting we believe there is currently scope for a reduction in policy rates as well,” said an IMF spokesman.

Meanwhile, the Professional Insurance Brokers Association (PIBA) said that a drop in interest rates would be merited, bringing it into line with the British rate which yesterday maintained its rate at the record low of 0.5%.

Director of PIBA mortgage services, Rachel Doyle, said: “The ECB’s conservative approach has in the past and is now also seeing it respond behind the curve.”

If the ECB rate was cut by 0.5%, this would mean a €46 decrease for a mortgagee on a 0.7% tracker with an outstanding loan of €190,000 over a 25-year period.

When Mr Trichet was asked about the possibility of rate cuts on the loans to bailout countries such as Ireland, he said the rescue packages are “a work-in- progress”.