Economy set to gain after surprise ECB Rate Reduction

Economy set to gain after surprise ECB Rate Reduction

Most market watchers were surprised when the key Eurozone lending rate came down from 0.15pc to just 0.05pc, a low unlikely to be seen again.

The ECB also announced an economic rescue plan that could see up to €500bn injected into the 18 countries that use the currency.

The cut announced yesterday, combined with the previous reduction in June, will mean annual savings of €240 in repayments on a €200,000 tracker mortgage.

The ECB bid to kick-start growth across Europe comes at a time when Ireland is one of the few countries in recovery mode.

Frank Ryan of Frank Ryan Financial Services suggests the move is primarily aimed at revitalising economies in Germany, France and Italy, but for Ireland it means:

• Pressure on lenders to ease off on mortgage rates for new home buyers.
• Savers are the big losers as banks continue a two-year campaign of rate cuts.
• Exporters will get a boost as the value of the euro started to fall, making goods that are sold abroad more competitive.
• More credit is set to flow for small businesses.
• Existing variable mortgage holders are to miss out on benefits, as banks are unlikely to pass
• on the rate reduction to the 200,0000 with these mortgages.
• Tracker mortgage holders are in line for more savings.
• The ECB’s lending rate has now come down from a high of 4.25pc in July 2008. The move will benefit 375,000 tracker mortgage holders, and comes just three months after the last reduction.

Homeowners who owe €200,000 on a mortgage will save around €10 a month from the latest reduction, which works out at €120 a year. This is because banks have to reduce interest charged on trackers every time the ECB cuts it.

A rise in ECB rates is unlikely until well in 2016, economists said. Some people on trackers will now end up paying as little as .55% in interest compared with an average variable rate of 4.5%.

A family on a €200,000 variable rate will be paying €350 a month more than a family with the same sized tracker rate. This works out at €4,200 over a year.