ECB may move to freeze or cut interest rates, says BoI

INTEREST rates could be cut by the European Central Bank (ECB) by as much as 50%, according to Bank of Ireland — a move that would wipe off €360 a year off repayments on a €100,000 mortgage.

The bank’s latest update on the economy also saw it revising its forecasts for the full year and it now projects GDP growth of 1.5%, with GNP set to rise by 1%.

The Bank of Ireland’s Quarterly Economic Outlook said the ECB is now effectively adopting a bias to ease. It said that at worst, this may mean rates on hold for some time and at best a 50% cut.

Group chief economist, Dr Dan McLaughlin, said: “On that basis the steady rise in mortgage interest seen over the past year may well come to a halt, even if we do not see a marked fall in the standard variable mortgage rate.”

The bank said that Ireland may see lower inflation next year given the prospect of lower rates. It said the unemployment rate may also ease modestly with the latest data shows that the cycle of falling employment may be close to a turn.

The bank, however, does not envisage significant job creation given the composition of Irish growth.

It said growth in the Irish economy has surprised to the upside in the first half of the year with GDP rising by 1.6% in the second quarter.

“Exports remain the main driver of that expansion, although growth in that sector has slowed of late, albeit offset by a more rapid deceleration in imports.

“Capital spending has also grown strongly in the first half of the year, adding to the growth momentum, and at some €22 billion, the inflow of foreign direct investment in the first six months of the year already exceeds the total for last year as a whole,” said Mr McLaughlin.

The bank said that consumer spending remains weak and will fall by 2.5% in 2011.

“Much is made of the rise in the savings ratio evident in recent years but we believe that the ratio has not changed much this year — the fall in consumer spending reflects a significant squeeze on real incomes, as inflation has accelerated while earnings are still falling, albeit modestly,” said Mr McLaughlin.

The report points out that investor sentiment towards Ireland has changed for the better in part because Ireland is meeting its fiscal targets.