ECB expected to cut rates by March 2024, providing relief for borrowers

The European Central Bank (ECB) is anticipated to initiate significant interest rate cuts potentially as early as March 2024, according to economists Austin Hughes and Simon Barry, and strategists at NatWest Markets. This revised prediction is a departure from earlier estimates that suggested cuts would only occur by the end of next year. The proposed reductions come in response to an economic slump and slowed inflation in the eurozone, which has raised fears of a potential recession.

In the past 18 months, the ECB has increased its lending rates ten times in an effort to control inflation, which has fallen from 10.7% in October 2022 to a current annual rate of 2.9%. This aggressive monetary policy has led to slowed economic growth within the eurozone.

The forecasted rate cuts are expected to provide significant relief for borrowers, particularly tracker mortgage holders who have faced substantial increases in their monthly repayments due to the ECB’s rate hikes. Michael Dowling of Dowling Financial suggests these reductions might begin by June 2024, although he warns that they are likely to occur at a slower pace compared to the previous ten ECB rate rises.

These cuts could also prompt banks to lower new fixed rates, potentially aiding first-time buyers. However, the benefits for variable and fixed-rate mortgage holders will depend on their banks’ decision to pass on these reductions.

Over the past year and a half, Irish mortgage rates have risen by 1.5 to 2 percentage points, impacting approximately 130,000 tracker customers. Joey Sheahan from MyMortgages.ie highlighted how these higher interest rates have burdened existing mortgage-holders and house-hunters, leading to increased monthly repayments and reduced borrowing capacity.

The ECB’s impending rate cuts are predicted to surpass market expectations. NatWest Markets strategists forecast a 1 percentage-point cut for next year, double the market’s prediction of a 0.5 percentage-point cut. Simon Barry suggests a potential 0.25 percentage-point cut by April.

The implications for mortgage holders are significant; a 0.25 percentage-point reduction on an average €300,000 mortgage could equate to savings of €45 in monthly repayments. Tracker-mortgage holders will see immediate benefits from these reductions.

Despite the expected easing, some financial experts have termed the current ECB rate cut expectations as a “doom and gloom” scenario. Goldman Sachs strategist Gurpreet Gill expects the first rate cut to occur next September, while TS Lombard’s Dario Perkins believes the ECB has overstepped with its rate hikes. Hawkish policymakers have dismissed bets on cuts in H1 2024 as “entirely misplaced”.

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