It is an ill wind that blows no good.
Low interest rates are generally seen as a sign of economic weakness and in that regard are not to be welcomed. However, for certain categories of borrower, low and falling interest rates represent manna from heaven.
I remember commenting some years ago that anybody lucky enough to have a tracker mortgage should hold on to it for dear life.
These sentiments resonated again last week when the ECB cut its base rate, off which tracker mortgages are priced, to a new low of just 0.5%. Based on where the eurozone economy is going and the fact that inflation in the eurozone is down at just 1.2% and still falling, it would be foolish to rule out a further decline in the rate.
It is happy days for tracker mortgage holders, but for many other mortgage holders the news is unfortunately not so good. The original introduction of the tracker mortgage, which guaranteed borrowers a low and fixed margin over the ECB’s base interest rate, was greeted as a major innovation in the Irish mortgage market. With the benefit of hindsight, they were probably not such a good idea. They helped fuel the boom in the housing market at the time, and they now represent a major loss-making instrument for the ailing domestic banking sector. As a consequence of the latter point, the banks are forcing those on variable rates and those who might be considering the fixed rate option to subsidise those on trackers.
Based on what is happening on official interest rate markets, there is no justification whatsoever for increasing either variable or fixed rates. Inter-bank interest rates are at very low levels, while five-year bond yields are down at 2.16% and 10-year yields are down at 3.4%, both levels that have not been seen for some time and both are still trending in a downward direction in line with bond yields in most of the developed world. However, the justification for the recent spate of rate increases and those likely to come over the coming months is that the banks need to offset the losses they are suffering on tracker products, and the general requirement to try to rebuild profitability. As was the case when the banks were originally bailed out, sorry I meant re-capitalised, it is the bank customers who are once again being asked to stump up and help the banks re-establish their viability.
From the perspective of the ECB the decision last week to cut interest rates to 0.5% smacks of desperation. The reality is that, if rates of 0.75% are not sufficient to stimulate economic recovery, then taking rates down to 0.5% will make little difference. It is akin to pushing on a piece of string.
Given the current mandate of the ECB, which is to keep inflation under 2% and protect the integrity of the euro, there is not a lot that it can do. However, it is essential at an EU level that pressure is brought to bear to amend the mandate of the ECB to facilitate the effective quantitative easing of money supply and a tolerance of higher inflation. In terms of individual countries, it is now imperative that the governments of the European countries, who have relatively strong public finances, engage in expansionary fiscal policy. If every EU government is intent on pursuing fiscal austerity and dampening domestic demand, then it becomes inconceivable that economic recovery can actually happen within the EU.
It is more likely that such policies will continue to dampen demand for imports, depress economic activity even further and continue to push unemployment up to dangerously and unacceptably high levels. If the EU is to be saved from a major survival crisis, the promotion of growth will have to become the mantra. That would give an incredible stimulus to the Irish economy — far more than any sort of domestic stimulus package might achieve.
© Irish Examiner Ltd. All rights reserved