From an Irish standpoint, the recent quarter point rate reduction by the European Central Bank can be regarded in two lights: one being favourable, the other less so. This decrease will alleviate stress on Irish debtors, instantaneously for tracker mortgage owners. These individuals have enjoyed three quarter point rate decreases, alongside a unique adjustment, leading to a cumulative reduction of 1.10% since June of this year. Despite the high costs of borrowing, the change in the rate environment is happening faster than anticipated. Due to the stuttering German economy, an anticipated French fiscal consolidation and a broad slowdown of the Eurozone economy, by March of next year, four more rate cuts are projected by markets. For the advantage to filter down to fixed and variable clients in Ireland, they need to wait for domestically-based lenders to implement their often rigid pass-through policies. The lowering of borrowing costs is, nonetheless, good news for overstretched households that have suffered under the weight of high prices. The unfavourable side of the ECB’s recent rate choice is that it will fuel the growth of already escalating house prices, currently rising at an unsustainable 10% per year. The most recent data from the Central Statistics Office, released on Wednesday, reveals national prices increased by an annual rate of 10.1% in the year up to August, and by 10.8% in Dublin. The twelfth consecutive month saw an uptick in headline inflation, a concerning trend for potential property buyers. Kieran McQuinn from the ESRI points out that while supply issues drive price growth, so do interest rates. “The cost of borrowing significantly affects house prices, so a decrease will inevitably push prices upwards,” he reports. John McCartney of BNP Paribas Real Estate Ireland believes this latest action will “add fuel to the fire as it may tempt those not pushed to their credit limits to accrue more debt for property acquisition.” While it’s reasonable that ECB monetary policy is shaped by the larger economies, it often doesn’t align with Ireland’s domestic business and house price cycle.
The belief that the Irish economy is on the brink of being dangerously overinflated, especially considering the latest government budget that has been released – this sentiment is echoed by the Irish Fiscal Advisory Council (Ifac). Their concern is that reducing interest rates and further increasing disposable income might escalate the situation further. The president of the European Central Bank (ECB), Christine Lagarde, maintains a hopeful stance for the economic scenario of the wider euro zone. She believes that it is yet to take a soft landing.
During a press conference held in Ljubljana, the capital of Slovenia, Lagarde confirmed the expectation of a soft landing scenario based on their current knowledge. Recession for the euro area isn’t a concern at the moment, according to their available data. However, there are a couple of serious warnings that could send the present economic path spiralling. The first being an extensive war breaking out in the Middle East, the second being the prospect of another term for Donald Trump as President in the United States. Either one or both circumstances could spell drastic changes for the current economy.