What does the latest ECB cut mean for borrowers, savers and the broader economy?

Irish Times

a day ago

Another rate cut from the ECB? How many is that now?
It is the eighth rate cut since the current downward cycle began a year ago – or the ninth if you count what the
ECB
called a 'technical adjustment' last September.
And why has the bank cut its rates again?
Eurozone inflation inching just below the magic 2 per cent mark (at least magic in the eyes of Frankfurt bankers) in recent days might be one reason. Fairly anaemic growth across some of the powerhouses of Europe is another reason while a slowdown in global trade caused by the Trump administration's dizzying turns on tariffs will also have been a consideration for economic policymakers.
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Will this be the last rate cut this year?
It is hard to say for sure. Some hawkish members of the ECB's governing council were against this cut and there is a widely held view that while there may be one more 0.25 per cent cut this year, we are coming to the bottom of the rate cycle. The ECB will – as it always does – insist that its moves will be determined by economic conditions as the year progresses but the smart money would suggest rates will hover at around 2 per cent in the medium term.
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ECB cuts interest rates by quarter percentage point
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Okay, enough about them. What will this latest cut mean for me?
It depends on who you are. If you are one of the 126,000 people who still hold a tracker mortgage you will see an almost immediate benefit as a result of the latest rate cut. If you are coming off a fixed rate in the month ahead you might – but it is only a might – be able to benefit from lower rates while variable rate mortgage holders and those who have mortgages with so-called vulture funds may also see rates drop slightly in the months ahead.
As a tracker holder, when will my rate fall?
The exact date will depend on the bank you are with, when your monthly repayment falls due and the nature of the mortgage contract you signed but banks have a window of around 30 days to pass on the rate cut which means you could see the benefit as early as your next repayment date.
And how big will that benefit be?
Again it depends on your individual circumstances but the latest ECB's quarter-point cut equates to a €13 a month saving for every €100,000 owed on a tracker mortgage. That means that if you have an outstanding home loan of €250,000 you are likely to be better off by around €33 a month from the end of this month. Some will see even larger savings while some will see more modest savings.
And how much have tracker holders saved over the course of the current cycle?
This is the eighth rate decrease since last June when the ECB cut rates by 0.25 per cent. It is actually the ninth if the technical adjustment that amounted to a 0.35 per cent cut that kicked in last September is included. That means the ECB's lending rate is now 2.15 per cent compared with 4.5 per cent this time last year. A tracker customer with around €150,000 left on their mortgage over 10 or 15 years, on a margin of 1 per cent, will now paying around €170 less each month compared to a year ago. That is just over €2,000 less than at the height of the interest rate cycle early last year.
That is pretty massive?
It is but context is key. While the rate cuts rolled out over the last 12 months have saved a certain cohort a significant amount of money, the rate hikes over the 18 months that came before that cost them dearly. A typical tracker mortgage holder with a loan costing them around €1,100 a month in 2021, might have seen their repayments soar above €1,500 at the top of the ECB rate cycle and while their current repayments of around €1,300 are a good bit less than what they were paying, they are also a good bit more than that were paying too.
But enough about tracker mortgage holders what about those on fixed and variable rates?
There is not likely to be any massive reduction in either fixed or variable rates from the mainstream lenders, in the short term although the Flex Mortgage announced by Bank Inter, formerly Avant Money should fall as its variable rates are linked to the 12-month Euribor rate.
According to industry experts in Ireland, the correlation between home loan rates and ECB rate cuts. is not as solid as you might think because lenders here tend to price predicted cuts – and indeed hikes – into their offerings. When the ECB increased interest rates by 4.5 percentage points course of 2022 and 2023, banks only increased their home loan rates by just over 2 per cent on average.
There is likely to be at least some pressure on fixed rates and more offerings slightly below 3 per cent might be on the cards in the weeks and months ahead.
And will people with vulture fund mortgages be better off?
There might be some relief on the horizon for many of those paying the very highest rates on the market but that remains up in the air.
All these cuts aren't good news for savers or the property market though?
That is right although it is worth pointing out that most savers are very much victims of their own misfortune.
What do you mean by that?
Irish people have more that €160 billion on deposit right now and around €140 billion of that is resting in accounts that offer very low or no interest at all. The ECB moves are likely to make no difference to this cohort as they are getting absolutely nothing for their money anyway. There will be downward pressure on the savings accounts that do offer rates of up to 3 per cent or so which will be very unwelcome news for many.
And what about the broader market?
Well cheaper money might fuel property price inflation here and with prices already climbing alarmingly fast that will not be good for anyone not least those looking to buy a home.