ECB rate cut in June would bring 'psychological boost' for Irish households and businesses

A start to rate cuts in June would bring relief for Irish consumers and businesses which over the past two years faced a whole range of increased costs

Economist Jim Power said a rate cut was coming in June because it was never going be the case that “the conservative ECB” would move before then.

The European Central Bank took a step closer to its first cut in official interest rates in early summer as president Christine Lagarde said the bank was taking comfort that its record high rates was helping to rein in inflation.

The ECB had pushed interest rates to record high levels after starting out on an aggressive campaign in July 2022 after inflation had flared to levels not seen for decades across Europe. 

Financial markets following Thursday’s meeting were more convinced than ever that the ECB would start reducing rates at its June meeting.

There would be “bumps on the road” but the ECB was on course to reach its inflation target, Ms Lagarde told reporters in Frankfurt. 

“Without being triumphant, without celebrating anything yet, but what we are observing is a decline in inflation, a disinflationary process that is in progress, that is comforting us that the monetary policy that we have adopted so far has contributed significantly to this, and that we will continue on the basis of the three criteria,” she said, referring to wages, corporate profits, and to productivity.

Any cut in early summer will deliver some sort of relief to many thousands of Irish households and business borrowers. 

Tracker mortgage borrowers over the past two years have taken the worst of the financial hit, and first-time buyers and existing borrowers on fixed-rate mortgages also face much higher monthly mortgage repayment bills.

Economic recovery likely later in 2024

In its communique, the ECB said that underlying eurozone inflation was “easing”, the growth in wages was “gradually moderating”, and that although still “weak” some sort of economic recovery was likely later this year as demand for eurozone exports improves. 

Unemployment remains at its lowest level since the birth of the euro.

Jack Allen-Reynolds, deputy chief eurozone economist at Capital Markets, said the ECB’s updated guidance means a rate cut “at the next meeting in June is very likely”. 

The ECB’s statement didn’t say it would cut in June but that with new inflation forecasts by then “that’s the most obvious timing”, he said.

Economist Jim Power said a rate cut was coming in June because it was never going be the case that “the conservative ECB” would move before then. 

A start to rate cuts will bring relief to Irish consumers and businesses which over the past two years faced “a plethora of increased costs” and a rate cut would be a “psychological boost” for households and businesses.

Mortgage broker at MortgageLine, Stephen Hamilton said it was now “pretty” clear the ECB would cut the rate in June and then follow up with further cuts before the end of the year.

There are 715,000 home mortgage holders in the Republic, including 107,000 borrowers on variable rates, 429,000 customers on fixed-rates, and 179,000 households who have tracker mortgages.

“Someone who took out a three-year fixed mortgage at 2.5% in 2021 could now be looking at a rate of 4%,” said Mr Hamilton, pushing repayments to €2,880 a year based on a mortgage loan of €300,000.

Many mortgage brokers are saying that Irish banks will be quick to pass on any reductions to customers.