ECB chief hints at further interest rate cut

ECB chief Mario Draghi announced that a further rate cut could be on the way as the eurozone economy remains fragile.

The main interest rate is at the historically low rate of 0.5%. Another 0.25% cut would be good news for the 375,000 tracker mortgage holders. However, it would put further pressure on the banks that are struggling to return to profitability.

Moreover, banks have been putting up rates on variable interest rate mortgages over the past two years.

Rachel Doyle, chief operations officer at the Professional Insurance Brokers Association, said, “The gap between mortgage holders on tracker rates and those of variable rates has been widening and we would anticipate that it will grow further, given that the sole priority of the banks seems to be getting back to profitability, regardless.”

There had been expectations Mr Draghi would outline plans to boost SME lending across the region. He said the ECB is acting in an advisory capacity to the EIB in looking at ways of how this could be achieved, which suggests there is no ‘big bazooka’ on the way over the near term.

There is growing pressure on central banks to use forward guidance at its monthly meetings. By using this, Mr Draghi’s aim is to persuade investors that the ECB has no plans to end its easy policy stance so they in turn will keep longer-term rates low, paving the way for consumers and households to borrow cheaply and bolster economic activity.

Historically, Mr Draghi and predecessor Jean-Claude Trichet have said that the ECB “never precommits” to any future monetary policy.

Mr Draghi said the reason for taking what he called an “unprecedented” step was the ECB’s expectation that the subdued outlook for inflation will extend into the medium-term amid broad-based weakness in the 17-nation euro-area economy.

“The risks surrounding the economic outlook for the euro area continue to be on the downside.”

While all 23 members of the council agreed on the strategy, Mr Draghi declined to specify a time frame for the “extended period” and said several forms of guidance were debated.

The ECB hasn’t built formal frameworks or set specific economic targets for when policy makers assess the course of rates. Instead, ECB officials will rely on the central bank’s traditional approach that looks at both money supply and a range of economic indicators, a source said.

At the same time, new Bank of England governor Mark Carney and colleagues in the UK signalled they’ll keep their key rate at 0.5% for longer than investors expected.

Additional reporting Bloomberg


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