Following a series of statements from its governing council members, it is now clear that the European Central Bank (ECB) is prepared to initiate interest rate reductions at the forthcoming session. In spite of signs that interest rate drops in the US and UK have been postponed, the ECB is evidently primed for action. This is good news for Irish homeowners, especially those with tracker mortgages who have felt the brunt of the rate increases – they can look forward to some respite, with further decreases likely to follow.
Still, the trajectory for later this year remains ambiguous. The ECB’s chief economist, Philip Lane, has warned, during an interview with the Financial Times, of a rocky and gradual journey. He suggests that the speed at which interest rates will decrease is undetermined and will largely be governed by inflation trends.
The ECB is currently in a strong position to manoeuvre. Having escalated interest rates to an all-time peak, it is now able to make significant cuts while also continuing to combat inflation. This should reassure the members of its governing council as they respond to indicators that inflation is reverting to the 2% target standard. Monetary policy implements with extensive delays, hence the art and science of decisive timing and scale. However, all markers hint at the ECB’s key lending rates dropping by 0.25 of a percentage point in the impending week.
Tracker mortgage rates will immediately plummet and the possibility of decreased loan costs, along with competitive pressures, has already resulted in some decline in the fixed rates obtainable by new borrowers and those approaching the end of their current fixed term. However, many coming off fixed mortgage rate deals will be moving onto significantly higher rates. This heightens the risk of some struggling with repayments and descending into mortgage arrears. There has already been some evidence of an upsurge in short-term arrears, albeit so far rather contained.
Banks must be prepared to handle this situation, and it’s paramount that the Central Bank ensures compliance to the code of conduct related to arrears. Moreover, customers should be promptly informed about their possible courses of action. This underscored the critical role of prudential regulations that cap the borrowing amount in comparison to income and require banks to execute “stress tests” on loans.
Eventually, a further overall decrease in interest rates should occur. Nonetheless, as banks have refrained from completely compensating for the rising European Central Bank rates, the possibility for additional reductions in many fixed rates may be somewhat restricted for now. The loan options provided to borrowers will not revert to pre-2022 figures. However, it’s high time for the ECB to take the initiative in lowering borrowing costs.