The Governor of the Central Bank has said he expects banks to pass on the ECB interest rate cuts to fixed mortgage holders “at some point”.
However, Gabriel Makhlouf said the pace at which that will happen will vary depending on the contractual arrangements people have with their lenders.
“The third of Irish households that actually have a mortgage, around half are fixed, so trackers will see the immediate change, but fixed and variable that will depend on the individual financial institution that they have their loan with,” he said.
Speaking on Morning Ireland, Mr Makhlouf said the ECB rate change announced yesterday was good news for the European economy.
“It’s good news for borrowers. It’s probably not good news for savers, it’s good news for businesses,” he said.
But he reiterated what ECB President Christine Lagarde said yesterday, “there’s no predetermined path for interest rate reduction.”
“We put up interest rates in 2022, we stopped putting them up in September 2023 and having looked at what has happened to inflation in the last nine months we are now confident that the disinflation process is working,” he said.
But he said this doesn’t mean they know how fast interest rate cuts are going to carry on – or even at all.
Mr Makhlouf said Central Bank projections for the economy will be published in the next few weeks and he will be writing to the Minister for Finance with his “own views as to what I think we should do in the Budget.
“My number one concern is to make sure that the Budget supports the ECB’s monetary policy decisions, doesn’t act in a cyclical fashion to fuel Irish inflation, because at the end of the day what we do in Frankfurt is decide on interest rates to manage prices across the whole of the euro area and not for Ireland in particular,” he said
“So, it’s quite important that the Government pays attention to what impact its policies will have on domestic prices,” he added.
He said that cutting taxes at the same time as increasing spending potentially does add to consumption in the economy and if there is no supply response, which is crucial, then it will add potentially to inflation.
“But it does matter as to how you cut taxes. It does matter as to what spending precisely you do, so the detail does matter here”, he said.
“The Government has set its own rule and I think it’s important the Government keeps to its rule. Certainly, we have an issue – the European fiscal rules are based on GDP numbers, which in Ireland are distorted. And the Central Banks, certainly we don’t use GDP as a significant measure of activity.
“But it’s a test of fiscal sustainability in particular. And I think what the Fiscal Council and I’ve said this in the past, you’ve set this rule and you should stick to your number. I mean that has been my view too,” he added.
In relation to lending limits for mortgages, Mr Makhlouf said that the Central Bank has never denied “that the changes that we made would add to prices, but the whole system is about preventing reckless lending and reckless borrowing.
“And there’s absolutely no evidence” that the changes made “are actually leading to destabilising the financial system.”
He said; “at the end of the day, our focus is on financial stability. The fact is that house prices are ultimately determined by supply and demand – and supply, as we at the Central Bank have been saying for some time, is failing to meet demand and that’s where a lot of focus and energy needs to be put.”
Traders question case for rapid ECB rate cuts
Traders scaled back bets that the ECB would cut interest rates twice more this year, and outpace peers in easing policy, after the euro zone central bank gave little hint yesterday of further moves.
The European Central Bank lowered its key rate by 25 basis points (bps) from a record high to 3.75% at its policy meeting on Thursday, its first cut in five years. However, it raised its inflation forecasts and President Christine Lagarde declined at a press conference to confirm it had entered a phase of ‘dialling back’ its restrictive monetary policy.
That led traders to price in just 36 bps of further rate cuts this year – meaning another cut and less than a 50% chance of a third to follow, compared with over a 60% chance earlier on Thursday.
When the ECB last met in April, traders were much more certain on a third cut.
The odds of a second cut by September fell to less than 70% from nearly 80% before Thursday’s decision.
“If we’d had more visibility about the cutting cycle it would have been perceived more positively but there is still uncertainty,” said Sabrina Kanniche, senior economist at Pictet Asset Management.
“Lagarde did not want to commit on the future path ahead,” Kanniche said.
Shifting divergence
The bank’s hawkish tone added fuel to a shift in the economic divergence theme, with receding ECB rate cut bets contrasting with a renewed increase in US rate cut expectations.
Earlier this year, the U.S. economy’s stronger performance against the euro zone had driven investor preference for the bloc’s debt and hurt the euro.
Since then, the bloc’s economy grew more than expected during the first quarter after a recession late last year. The United States in contrast grew at less than half the rate it posted in the fourth quarter.
While traders have become less convinced on the scope for ECB rate cuts, they have increased bets on Federal Reserve easing, now expecting nearly 50 bps, or two cuts, this year, up from less than 35 bps a week ago.
The odds of a September Fed cut are now seen higher than one from the ECB.
“What we may now be seeing, if the data turns a little bit more in the U.S. and the Fed can go ahead with a cut in September, that may be the saving grace for the ECB (to cut in) September,” said Soeren Radde, head of European economic research at hedge fund Point72.
That shifting outlook means government bonds in the euro zone will continue to lag, after they underperformed US Treasuries for the first time since January last month, losing 0.2%, while US Treasuries gained 1.5% .
Euro zone bonds have lost investors 1.2% year-to-date, double the 0.6% loss on US Treasuries.
“The potential return you have from when you buy core and semi-core euro zone sovereign bonds is limited. Many investors have been reluctant to go in and buy,” said Camille de Courcel, head of G10 rates strategy for Europe at BNP Paribas.
And in June so far, Germany’s 10-year yield, the euro area benchmark, has dropped 10 basis points, half the 20 bps drop in US peers. Bond yields move inversely with prices.
Roman Gaiser, head of fixed income for EMEA at Columbia Threadneedle, said he did not see gains ahead for euro zone government debt.
“We’re not piling in,” he added.
Prospects for fewer ECB cuts is better news for the euro EUR=EBS. It edged higher on Thursday to $1.0883, adding to its roughly 2% rally from a five-month low hit in mid-April.
JPMorgan Private Bank’s head of global FX strategy Samuel Zief sees a fair value of around $1.10 — implying another 1% of gains.
The euro zone’s improving economic performance means European stocks are also seen gaining. While underperforming US peers, they have rallied over 9% this year and touched record highs earlier on Thursday.
European equities are “the main overweight we have in our global equity funds,” said Kevin Thozet, investment committee member at asset manager Carmignac, adding the euro zone economy is in a “sweet spot”.
Still, the shadow of the U.S. economy and Fed policy loom large over global markets, and that’s no different for the euro zone.
Point72’s Radde said he would have expected a further scaling back of traders’ ECB rate cut expectations after Thursday’s policy meeting had it not been for a softening U.S. economy.
“Lagarde was striving to argue (on Thursday) why they are not committing a policy mistake in cutting rates today,” Radde said.
“That should have elicited quite a strong reappraisal of the rate outlook, and the fact that it didn’t means there’s a strong overlay from outside the euro area.”
Source: rte.ie