AKC News // ECB signals further rate reductions

The European Central Bank cut euro zone interest rates to an all-time low today, and signalled further reductions were possible as its staff forecast the euro zone economy could contract by over 3% this year.

Read about how the rate cut will impact your mortgage here.

The ECB kept up its record pace of reductions with the half a percentage point cut to 1.5% as the economy slides deeper into recession. Bank President Jean-Claude Trichet noted it had now slashed borrowing costs by 2.75 percentage points since October, saying he could not exclude further moves.

He also said the ECB's governing council was studying other possible measures, known by economists as quantitative easing. The Bank of England earlier announced such moves, saying it would buy assets worth a total of £75 billion sterling in a drive to help the British economy by expanding the money supply.

Inflation would remain below target this year and next, he told a news conference in Frankfurt after the ECB announced its decision.

'Inflation rates have decreased significantly and are now expected to remain well below 2% over 2009 and 2010,' he said.

Asked if rates had hit the bottom, he said the bank had not decided that this was the lowest point that rates could reach. 'Further decisions will depend on facts, figures, judgement on the basis of Governing Council discussions,' he stated.

Staff economists at the ECB were gloomy about the outlook for the 16-nation euro zone, expecting a much sharper contraction this year than previously and only tentative recovery in 2010.

Their new quarterly projections saw GDP contracting by 2.2% to 3.2% this year, compared with the previous estimate of -1-0.0%, giving a midpoint of a 2.7% fall. The bloc's economy may grow again in 2010.

The forecasts ranged from a GDP drop of 0.7% to a rise of 0.7% next year, for a midpoint of zero. That was significantly lower than the 0.5-1.5% growth forecast made in December.

The current drop in inflation was 'reflecting the severe downturn in economic activity', Mr Trichet said.

Inflation in the bloc was 1.2% in February, well under the ECB's target of below, but close to 2%.

Recent economic data had added 'further evidence to our assessment that both global and euro area demand are likely to be weak in 2009. Over the course of 2010 (it) is expected to gradually recover', Trichet said.

Official data today also confirmed the euro zone's economy suffered the worst quarter on record at the end of 2008. Other surveys have also shown confidence is at an all-time low, while the bloc shed more than quarter of a million jobs in January.

Banks passing on rates in full

Permanent TSB, KBC Homeloans, EBS, Irish Nationwide and Halifax and Bank of Scotland (Ireland) said the full half a percentage rate reduction would be passed on to customers with variable and tracker rate mortgages.

Bank of Ireland and ICS Building Society also confirmed this afternoon that they will pass on the full ECB rate decrease across their tracker and standard variable rate mortgage products, for new and existing owner-occupier customers.

An AIB spokesperson said the rate cut would be passed on in full to all owner-occupier mortgage holders. Holders of tracker mortgages, and any variable rate mortgages will benefit. No decision has been made yet on buy-to-let mortgage holders.

But National Irish Bank has said that it will not be passing on the ECB rate cut to standard variable mortgage rate holders, though tracker rates will fall by 0.5 points.

NIB said it had signalled in January that it saw little scope to pass on future rate cuts. It added that a range of deposit rates for savers would also not be reduced.

Ulster Bank and First Active will pass on the cut to tracker mortgage holders, but Ulster Bank said the variable rate was 'under review'.

Source: RTÉ Business

Date : 05-03-2009