The conversation surrounding substantial reductions in interest rates across major economies began in the United States. This led to significant advancement in both equities and bond markets, promising an enhanced 2024 for debtors, especially those on tracker rates and potentially more broadly as other loan deals elevated.
However, in the recent weeks, unexpected high inflation statistics in the US sparked one of the most substantial turnaround in the market temperament in recent times. The formerly anticipated 1.5 percentage point decrease in American rates this year has now been adjusted, with markets factoring in a likely solitary deduction in September.
This week, Jerome Powell, the Federal Reserve’s chair, claimed that there was a “absence of further progress” towards achieving the 2% inflation target. This has led to decreased assurance concerning the extent of deductions by the European Central Bank (ECB). However, the central message for borrowers in Ireland is to stay calm. Therefore, let’s examine what has transpired in the US and its implications for Europe, including Irish homeowners.
In the US, there has been a significant and unanticipated shift in interest rate prospects. Economist Simon Barry suggests the trigger for this alteration is the ongoing robustness of the general US economy, the labour market in particular, and a pause in the progress of decreasing inflation. Recent findings highlight the challenge of reducing inflation to meet the 2% target, with the rate escalating to 3.5% in March.
Previously, there were anticipations of six quarter-point US interest rate deductions this year, but these have been reduced to one or two. A major rally in equity markets last October paused in early April, and while discussions vary about the reason, most attribute it to adjustments in interest rate expectations. Although the majority of investors anticipate inflation to lessen and US interest rates to decrease, UBS’s latest monthly overview emphasises a “rate cuts deferred, not annulled” scenario. They predict a quarter-point Fed reduction in September and another one in December. Lastly, Powell’s Wednesday address, especially his prediction that inflation will decrease this year, albeit gradually and uncertainly, has somewhat reassured markets.
This year, alterations in the American market have influenced the expectations of European Central Bank (ECB) rate cuts significantly. Previously, investors had anticipated a 1.5 percentage point drop in ECB rates, but that prediction has now been scaled back to just above 0.75 of a point. Consequently, investors now expect three quarter-point reductions instead of the previously anticipated six. However, despite this shift in the investors’ mood, they still anticipate the ECB to commence a round of interest rate cuts beginning next month, therefore, likely initiating these cuts before the Federal Reserve.
Christine Lagarde, the President of the ECB, has indicated that whilst the ECB is handling a differing economic outlook, the events transpiring in the US will undeniably have a worldwide ripple effect. April recorded a 2.4 per cent inflation in the eurozone, with wage pressures in the region being less than those in the US. Core inflation, which rules out the effects of oil and food, has somewhat exceeded ECB’s predictions, though it decreased to 2.7 per cent last month. Hence, an ECB move appears to be on the horizon in June, as hinted at their previous meeting. However, this is subject to the data to be examined carefully leading up to their gathering in June.
Discussions are taking place concerning the potential implications of the ECB moving ahead of the Federal Reserve and the diverging trends in interest rates. One possible outcome is a weaker euro against the US dollar, leading to an increase in EU import costs and inflation rates. Furthermore, higher growth in the US, contributing to global growth, could argue against the eurozone’s rates falling too rapidly.
This week, the economy of the eurozone demonstrated signs of avoiding a recession this year, with growth figures in France and Germany slightly exceeding expectations. However, the eurozone’s economy remains sluggish. Some ECB governors have inverted the argument, proposing that what’s happening in the US bolsters the case for ECB rate cuts, as higher US interest rates may dampen global growth.
The Chief Economist at the Bank of Ireland, Conall Mac Coille, suggests there’s no established “correct stance” on this matter, noting the Federal Reserve and European Central Bank (ECB) have deviated from each other’s policies earlier, a pattern that could repeat itself. He conjectures that a possible shift in exchange rates due to varying interest rates on the Eurozone and the US won’t notably influence Eurozone inflation.
This leads us to consider how Irish borrowers could be affected. Rising uncertainties may cause the ECB’s planned interest reductions to occur at a slower pace, drawing from events in the US as well. Nevertheless, both Mac Coille and Barry argue that the ECB’s deposit rate, which currently stands at 4%, far exceeds the neutral level that neither accelerates nor hampers the economy. Given this observation, there’s definitely room for interest rates to drop, even though the exact timing remains unclear.
Barry argues that the high interest rates at present, which critically hamper growth, are no longer necessary for the ECB to sustain the drive towards its inflation targets. Excepting a drastic surprise in US-style data, it is predicted that a reduction will take place in June, with further cuts being gradually implemented as the year progresses.
Tracker mortgage clients will benefit directly from these reductions as their payments typically slump the following month whenever there is an ECB cut. While this initial cut of 0.25 point may appear minute compared to the 4.5 point increase since the 2022 summer, there is optimism about further cuts expected later this year and in 2025. The downside, however, is the interest rates will not revert to their pre-pandemic and pandemic-level figures. If the ECB decides to adjust its fundamental rates back towards neutral levels, it is speculated that a tracker rate within the mid 3% range may be anticipated.
The outcomes of the ECB’s decisions might not be immediately seen for some borrowers. Specifically, variable and fixed interest cuts haven’t mirrored the ECB’s rising trends, which indicates they may not see a similar magnitude of decrease, either. However, a positive development is coming from elsewhere. Bankinter, the parent company of Avant Money, has increased its operations here and as a result, significantly decreased its three-, four- and five-year fixed interest rates. These fresh rates, set to come into action on May 3rd, are projected to be between 3.6 to 3.95 per cent, depending on the term and loan-to-value ratio – substantially lower than the 4.5 per cent and higher from mainstream banks for ineligible green offers borrowers.
Aligned with this, traditional banks’ heightened rates for non-green mortgages are predicted to drop. For those unwilling to alter their banking institution, mainstream lenders also present variable deals that let them sit tight for several months, while undertaking minimal risks.
This means that potential borrowers or those transitioning from older fixed rates now have a wider variety of options, whether they are eligible for green rates, one of the improved BER rates from the Bank of Ireland under its updated structure, or if they aren’t eligible – in which case, the new offers from Avant are appealing. It seems that most will be able to secure a loan falling within the 3.5 to 4 per cent range, an enticing proposition considering the current situation. Any potential benefits which could have resulted from quicker ECB rate adjustments seem to be offset by the key driver in interest rate determination – competition.