For the first time in almost half a decade, the Irish mortgage holders have experienced a slight relief as the European Central Bank (ECB) trims interest rates. However, the ECB forewarned that persistent pricing pressures throughout the union are largely due to an increased wage growth rate.
The central bank based in Frankfurt lessened the fundamental lending rate, the factor influencing mortgage rates, from a historic peak of 4.5 per cent to 4.25 per cent by cutting it by 25 basis points. This downward adjustment of a quarter-point, anticipated in advance, will decrease monthly payments for every €100,000 of tracker mortgage debt by roughly €12 to €13. Hence, tracker mortgage customers with an outstanding debt of €200,000 for a decade or a decade and a half will have a monthly saving of approximately €25.
According to the newest evaluation of inflation outlook, nine months of stable rates warranted a moderation of monetary policy restriction, the ECB explained after noting a decline in inflation by 2.5 per cent since the last tweak in their monetary policy in September 2023. Nonetheless, the bank alerted that in spite of the improvements, robust domestic pricing pressures persist due to high wage growth, and thus inflation is expected to exceed the target deep into the following year.
The bank also escalated its forecasts for both total and core inflation, indicating that the average headline price growth across the Union would reach 2.5 per cent in 2024, scale back to 2.2 per cent in 2025, and further drop to 1.9 per cent in 2026. In contrast, underlying inflation, which does not consider energy and food, is projected to average 2.8 per cent in the current year, fall to 2.2 per cent in 2025, and shrink to 2 per cent in 2026.
Attention will mostly shift towards the ensuing speech by the ECB President, Christine Lagarde, after the meeting and the subsequent undertakings of the central bank. While, the market anticipates two additional rate cuts this year, the future trajectory of consumer prices remains an enigma. The unexpected rise in Eurozone’s inflation in May, which peaked at 2.6 per cent, indicates a possibly tougher than forecasted scenario, as the counterparts in the U.S. Federal Reserve have postponed their own course of rate reductions.
The inflation surge experienced in the previous month was driven by the growing prices in the service industry, closely tied to wage increases. Economists express concern over this development as it could potentially initiate a cycle of constantly rising wages and inflation; a phenomenon known as wage-price spiral which makes managing inflation exceedingly difficult.
Workers from a myriad of sectors are advocating for improved compensation to compensate for the diminished actual income they have experienced over the former two years.
An important indicator of wages within the Eurozone, released the previous month, didn’t slow down as initial policy anticipations suggested. This indicates that the pressures on prices, especially within the services sector, might require additional time to be controlled.
Simultaneously, the economic growth of the Eurozone rebounded in the first quarter with more strength than predicted following a slump into the negative towards the last year’s conclusion. This positive economic upturn is predicted to maintain an upward pull on prices, possibly causing policymakers to tread carefully while considering slashing rates too swiftly.
The European Central Bank’s record-setting increments of interest rates spanning from July 2022 through to September 2023, including 10 successive rate hikes, has aided in reducing the headline inflation rate. This rate was down from a peak of 10.6 per cent in October 2022 to 2.6 per cent in this past month.