Irish Financial Review

Three Central Banks Act to Stimulate Economies

Major Central Banks Act to Stimulate More Borrowing and Lending

Three of the world’s major central banks announced interest rate policy changes in the space of an hour yesterday. The ECB cut its benchmark interest rate to 0.75 percent, the lowest level in its 14-year history. China’s central bank unexpectedly cut regulated bank lending rates for the second time in four weeks. And the Bank of England said it would expand its holdings of government bonds by about 15 percent.

Interest rates fall to record low

The actions once again cast central bankers in the role of primary responders to the global economic problems, aiming at the same basic goal that they have tried to hit repeatedly over the last six years: encouraging people and businesses to borrow and spend and take greater risks with their investments. The ECB also took action to try discourage commercial banks from hoarding cash and force them to lend again as a means of returning to profitability. This is recognition that a large problem with much of the monetary policies of the past can be thwarted by low levels of lending by commercial banks.

The eurozone and the UK are mired in economic recession and the United States is faring little better. Just last week, the city of Stockton in California filed for Bankruptcy protection. It is one of several US cities to have done so. And as the US faces another economic slowdown, policy makers have not yet succeeded in restoring public confidence that better days are coming.

The latest round of modest monetary measures is unlikely to result in an economic turnaround, especially if some domestic and retail banks fail to pass on the full value of interest rate cuts to their customers. To make matters worse, some of the central banks are fast running out of easy options on the monetary policy front.

Throughout history, central banks have often returned to tried and tested means of turning economies around. Printing money and quantitative easing have been some of the tools they have used as peacetime measures. The election of President Hollande in France happened at an important juncture in the ongoing sovereign debt debate in Europe. Perhaps it will be pivotal?

But back to the present. When three central banks begin singing from the same hymn sheet, this is cause for concern. Here in Ireland, surely the needs of individual banks must give way to the greater needs of society. Surely, passing on those rate cuts is the right thing to do. Additionally, increases in lending are vital, both here in Ireland and more broadly, across Europe. After all, central bank activity will only have limited success if local banks refuse to play ball.

ECB cuts interest rates to historic low

Irish mortgage payments to fall as some banks refuse to pass on rate cut.

European Central Bank officials meeting in Frankfurt today voted to reduce the benchmark interest rate by a quarter-percent to .75%, a record low for the eurozone.

Mr. Draghi has been actively pushing interest rates lower

Tracker mortgage holders will immediately benefit from the announcement. There are an estimated 400,000 tracker mortgage holders in Ireland.

Those with standard variable rate mortgages (of which there are an estimated 200,000) are also likely to benefit, although this will depend on the individual bank and whether or not they will actually pass on the rate cut to mortgage customers.

Already, Allied Irish Bank (AIB) has announced that it will not be passing on the rate cut to its standard variable rate mortgage holders, citing a need to retain the money itself.

Other lenders are expected to announce their decisions in the coming days.

Below is a breakout of the outcome of a 25 basis point cut.

Tracker 25bps decrease
Mortgage Amount Current Payment (2.00%) New Payment (1.75%) Decrease
€400,000 €1,478.48 €1,428.97 -€49.51
€300,000 €1,108.86 €1,071.73 -€37.13
€250,000 €924.05 €893.11 -€30.94
€200,000 €739.24 €714.49 -€24.75
€100,000 €369.63 €357.24 -€12.39
Based on 30-year term, ECB + 1%

Mortgage payments expected to fall with ECB rate announcement

Irish mortgage holders may be in for a welcome financial boost tomorrow.

European Central Bank officials meeting in Frankfurt are expected to reduce the benchmark interest rate below 1% for the first time in the bank’s history.

Much needed rate cut

Rate cut to provide financial boost for mortgage holders

 

A rate cut of 25 basis points (quarter percent) now seems increasingly likely.

Tracker mortgage holders will immediately benefit from the announcement. There are an estimated 400,000 tracker mortgage holders in Ireland.

Those with standard variable rate mortgages (of which there are an estimated 200,000) are also likely to benefit, although this will depend on the individual bank as not all banks passed on the last series of ECB rate cuts announced in November and December.

Ulster Bank was the worst of the major banks. It refused to pass along any of the November of December rate cuts (it later announced a separate spring rate cut) so it will be interesting this time around if it looks to appease customers with a rate cut as a goodwill gesture in light of their ongoing IT and account reconciliation problems.

Bank of Ireland and AIB alternated, passing on some or all of the rate reduction in November and December. EBS also passed on the rate reductions, but not the full amount in one of the months.

NIB had perhaps the worst possible timing. Not only did it refuse to pass on any of the rate cuts, but it also announced a massive rate hike for its standard variable rate customers at the same time.

KBC and Permanent TSB were the best of the lenders as both passed along the full value of the ECB rate cuts. However, Permanent TSB was making up for the series of awful rate hikes it had subjected its SVR customers to earlier. Permanent TSB had hiked interest rates by a massive 2.5% before being given State support.

Below is a breakout of the outcome of a 25 basis point cut.

Tracker 25bps decrease
Mortgage Amount Current Payment (2.00%) New Payment (1.75%) Decrease
€400,000 €1,478.48 €1,428.97 -€49.51
€300,000 €1,108.86 €1,071.73 -€37.13
€250,000 €924.05 €893.11 -€30.94
€200,000 €739.24 €714.49 -€24.75
€100,000 €369.63 €357.24 -€12.39
Based on 30-year term, ECB + 1%
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