It appears that a further decrease in the European Central Bank’s (ECB) interest rates may be imminent next week, which may signal additional deductions given the frailty of the Eurozone’s economy. This has significant ramifications for borrowers, housing market trends, and the broader economic landscape.
June and September have witnessed two rounds of rate cuts by the ECB. Despite the lack of clear indications regarding future reductions at the time of the last cut, economist Simon Barry posits that recent developments strongly suggest a need for additional easing in policy.
With the Eurozone’s economy- particularly its manufacturing industry – in a poor state, alongside an inflation rate that stood at 1.8% in September, falling short of ECB’s 2% target, market analysts are predicting another rate slash next week.
Although a further cut could benefit borrowers, it may not be required for the economy. Tracker mortgage holders have benefited from the gradual reduction in ECB rates, which is slowly lowering borrowing costs.
An added bonus for tracker holders came from a 0.35% cut following an alteration in the ECB’s method of setting different interest rates. With the two rate cuts so far and this technical adjustment, tracker holders can expect an approximately 0.85 point reduction this month, which would translate to estimated monthly savings of €50 on a standard tracker balance of €130,000. By year-end, the savings could potentially increase to €80 or more if additional cuts are put into effect.
Major lenders have responded by slightly reducing their fixed rates in a bid to secure more market share. However, mortgage broker Michael Dowling notes that fixed interest rates increased by only 1.75 points as ECB rates escalated by 4.5 points from June 2022 to October 2023, signalling limited potential scope for further cuts in some offerings.
Given the substantial discrepancies in rates across the market, borrowers must approach this scenario with caution. Differences exist not only between various lenders but also within individual banks themselves.
AIB, as an example, gives an attractive five-year fixed eco-friendly rate for properties with B3 or higher building energy ratings (BER), of as little as 3.2 per cent. However, if the BER ranking is less efficient, the fixed rates for a period of three to five years exceed 4.7 per cent, seeming quite expensive. Hence, some borrowers who are not eligible for these reduced eco-friendly rates have presently elected to stay on a variable rate.
There are alternative options such as Avant, which delivers fixed rates without any BER criteria, just over 3 per cent. Borrowers are encouraged to carefully research and seek expert guidance.
As interest rates are predicted by Dowling to decrease over the forthcoming 12 to 15 months, an increased number of individuals could possibly lock in rates around or near 3 per cent, which would be a wise move.
In terms of the property market, house prices have again experienced a drastic increase in recent months, with the newest CSO data indicating an annual rate increase of 9.6 per cent as of July.
Following a decrease last fall due to high interest rates, house price growth has picked up pace again due to a recent and unwelcome increase in interest rates. Decreasing interest rates will enhance market demand by making loans more affordable while supply continues to significantly lag.
Pangea Mortgages’ broker John Fahy suggests that average price growth could potentially reach 10 per cent this year and perhaps duplicate in 2025, thanks to factors such as high salary growth, government incentives, robust population growth, and falling interest rates, thus creating a high-demand property market.
Fahy also highlights that the emergence of new lending products, especially equity release offers targeted mainly at older borrowers, along with the role of the “Bank of Mum and Dad”, now used by nearly 40% of borrowers, will also maintain demand.
On the economic side, reduced interest rates will be a relief for borrowers. However, the broader economy, already at its capacity and expecting an upsurge from budget funds in the coming months, does not require them. According to Ger Brady, chief economist at the Irish Business and Employers Confederation (Ibec), if households spend the budget boost, it could significantly push consumer demand by a substantial five per cent in the final quarter of the ongoing year.
Although some funds will undoubtedly be set aside for savings, households with greater economic means are expected to increase their discretionary expenditure, factoring in the dual child benefits and energy credits. Irish retail and hospitality sectors are under pressure with increasing insolvencies.
Moreover, the cut in interest rates is set to turn up extra money for some. The market still holds approximately 130,000 tracker mortgage owners whose loans were set before 2008 and ceased to be after the slump.
Predictably, an augmentation in the yearly household revenue by nearly €1,000 observed by the year-end, with more expected in 2025, will lift their spending capability. Concurrently, the overall dip in lending rates is bound to wield an extensive effect.
Surprisingly, while household earnings were negatively impacted by heightened inflation in recent years, there was close to a 6% hike in wages in the first semester of the year per the Central Statistics Office (CSO) records. Hence, real salaries are once more on an upward trend.
In addition, the labour market maintains its robustness. However, Gabriel Makhlouf, the Central Bank governor, cautioned this week about the supplementary budget stimulus to an economy that is already at maximum employment.
In an unexpected twist, policies by the ECB, which are devised for the large Eurozone economies, might kindle this flame further.