Draghi: ECB has not ruled out further rate cut

The ECB has not ruled out cutting interest rates further than their historical low of 0.5% in a move that could see Irish banks lose even more money on their tracker mortgage books.

Head of the ECB Mario Draghi said, “we haven’t reached the zero bound” and rates will “stay where they are or go lower”.

Mr Draghi’s comments mean that if the council of the European Bank thinks the European economy needs a further stimulus, it could cut the ECB rate as low as a 0.25%.

Davy chief economist Conall MacCoille said that this would be bad news for Irish banks’ tracker books, but that the losses would be offset by bonds.

“The banks have negative margins already on some tranches of their mortgage books so it would reduce those even further,” he said.

However, these losses would be offset by gains that banks would make on their bonds. Mr MacCoille said that, if rates were to be cut further, bonds would go up which would have an offsetting effect on the banks.

However, while Mr Draghi said it was possible for the ECB to cut its rate in the future, he held the current rate at 0.5% as there were signs the European economy was recovering.

ECB board member Joerg Asmussen indicated that it would be more than a year before the ECB decided whether or not to cut the base interest rate. He said the guidance was good for “beyond” 12 months.

Mr Draghi said there were signs there was a real recovery under way in Europe with a number of indicators pointing to the eurozone leaving recession.

The only reference that Mr Draghi made to Ireland was to praise the country in the same breath as Greece and Portugal for using the breathing space bought by the announcement of outright monetary transaction to implement reforms.