ECB set to keep interest rate at record low until 2012

INTEREST rates set by the European Central Bank (ECB) could stay at a record low until 2012, it has been suggested.

Yesterday’s decision by the ECB to keep interest rates at 1% is particularly good news for homeowners on tracker mortgages.

Tracker mortgages are based on rates set by the ECB, while rates on standard variable mortgages can be set by banks, many of which have started to increase rates significantly.

Figures have shown that interest rates controlled by Irish-based banks soared by 6% in May, impacting significantly on the charges being faced by variable mortgage holders.

In good news for tracker mortgage holders, NCB stockbrokers expect the ECB to keep rates on hold for all of 2010 and 2011.

Other analysts say it will be at least the middle of 2011 before the ECB hikes rates again.

The Professional Insurance Brokers Association (PIBA) said the news is less positive for first-time buyers and homeowners on variable mortgage rates, with lenders expected to increase rates by 0.25% to 0.5% by the end of the year.

Ernst & Young believes the first interest rate increase will come around the middle of next year at the earliest.

“The ECB’s decision not to change interest is no surprise. The central bank is facing difficult months ahead, where it will have to steer policy through financial turmoil, very weak growth in the eurozone and deflation in some countries,” said Ernst & Young Eurozone adviser Marie Diron.

ECB president Jean-Claude Trichet said yesterday that the bank’s benchmark rate of 1%, which is four times the comparable Federal Reserve rate, remains appropriate.

Meanwhile, figures from the Central Statistics Office (CSO) have shown that mortgage interest rates are now 10% higher than they were a year earlier giving rise to a considerable slowing in the level of price falls across the economy.