Governor Gabriel Makhlouf of the Central Bank is anticipating that interest rate cuts will soon be reflected in lender practices, despite an uncertain future on further interest rate drops from the European Central Bank (ECB). He suggested that those in possession of tracker mortgages will instantly benefit from lower interest rates, trailing the initial ECB cut in half a decade. Mr Makhlouf communicated his expectation for financial institutions and other lenders to follow suit on this trend, especially regarding mortgages unlinked to ECB interest rates.
However, he noted considerable variation in the speed of this adaptation due to the differing agreements borrowers have with their lenders. The governor’s message indicated good tidings for borrowers, albeit less positive for savers. With regards to inflation, he interpreted the ECB’s view that control is being effectively regained, but the exact rates of deflation remain somewhat undefined.
Mr Makhlouf, who acts as a representative on the ECB governing council, also pointed out the challenges that persist with inflation. This follows the council’s vote in favour of the interest rate drop, marking it the first of such nature in the last five years. Nevertheless, the continuous sticky nature of inflation necessitates further careful consideration on subsequent rate reductions. Following Fridays released ECB data revealing the speedy rise of euro-zone wages during Q1 of 2022, concerns mount. The detrimental repercussions of an excessive wage increase pose risks, potentially triggering an inflation hiking wage-price spiral.
The governor downplayed a study from the Economic and Social Research Institute (ESRI) last week, which claimed that the Central Bank’s decision to relax mortgage lending rules has caused house prices to rise. The ESRI criticised the regulator’s decision to ease rules, stating that the ratio of average loan to income in the Irish mortgage market has reverted to levels only previously seen during the height of the Celtic Tiger boom.
“We’ve never disputed that the alterations we initiated would increase prices,” he commented. “The entire system is designed to inhibit irresponsible lending and borrowing. There’s no proof that these changes are causing instability in the financial system,” he contended.