0.5% ECB cut may not be passed on

BORROWERS may not get the full benefit of the 0.5% cut in interest rates announced by the European Central Bank.

Ironically, intense competition for deposits may force lenders to keep deposit rates up in order to fund the high demand for money in the economy for mortgages.

Felix O’Regan of the Irish Bankers’ Federation said the banks had “to make it worth depositors’ while to put their money on deposit. The other option is to put it under the mattress,” he said. And with official ECB rate now at 2.75% the lowest for decades, a corresponding cut in deposit rates could seriously damage the inward flow of funds, he said.

Some institutions such as Irish Nationwide Building Society cut rates in advance of the ECB move. Others are considering their positions, endeavouring to get the mixture right.

Even if lenders cut by the full amount, the savings of between €28 per month on a €100,000 mortgage totalling €336 a year or the €55.40 per month on a €200,000 mortgage, it will make little impact after the changes in the Budget. The Institute of Professional Auctioneers and Valuers pointed out that the VAT increase from 12.5% to 13.5% will add €2,000 on average to a new house costing €200,000. Add to that the loss of the €3,800 first-time buyers’ grant and the IPAV said the change in mortgage rates was cold comfort to hard-pressed buyers reeling from the double whammy from the finance minister. IPAV chief executive Liam O’Donnell said “the scale of hardship imposed on vulnerable first-time buyers was appalling and totally unjust and unfair.”

Even with the cut of 0.5% from the ECB and the change in mortgage interest relief of €825 a year for the first-time buyer, the stark reality is that ordinary citizens have been seriously damaged by the Budget. Even allowing for the savings on a full 0.5% cut of €660m, the counter-impact of the VAT and the abolition of the first-time grant are devastating, Mr O’Donnell said. He reiterated his call on the minster to use the Finance Bill to change his decisions as a matter of urgency.

IIB Bank’s Austin Hughes, reacting to the ECB move, said it wasn’t before time.

And not for the first time he called into question the integrity of the ECB. Mr Hughes asked if the ECB was “split” over interest rate policy, given that all reasonable analysis suggested the bank should have acted earlier.

But the move will be welcomed, signalling as it does the ECB’s commitment to support economic growth, he said.

On the broader issue, the cut would provide a timely boost for the economy, but it rules out any further changes in rates here until well into the spring, analysts said last night.

But Mr Hughes is convinced that the ECB will act again in April or May and put another 0.25% reduction in rates into the system.