Archives November 2023

Central banks will struggle to hold hard line as the economy slows

Interest rate cuts are on the cards sooner than anyone thought, but don’t expect a return to the super-low rates of old.

Finance Minister Michael McGrath said yesterday he expects a reduction in the European Central Bank’s main borrowing rate – which has been at a euro era high of 4.5pc since September – as early as the first half of next year.

His comments came as flash inflation estimates showed price rises slowing by more than expected in Germany, the bloc’s largest economy. German inflation came in at 2.3pc in November, the same as in Ireland, while inflation also slowed in Spain, feeding expectations of a lower eurozone figure ahead of its publication today.

Lower inflation and a third quarter economic contraction in the eurozone should allow the ECB to keep interest rates where they are when they meet in mid-December, after central bankers hit the pause button for the first time in over a year at their most recent meeting in October.

“Overall, inflation looks to be benign in the eurozone,” said ING’s senior eurozone economist Bert Colijn.

“For the ECB, this confirms the view that next year could bring about a first rate cut. With inflation trending down better than expected, this could happen earlier than expected.”

But ECB president Christine Lagarde told MEPs this week that inflation is still too high and that rates need to stay higher for longer, while other central bankers – including Ireland’s Gabriel Makhlouf – are saying a rate hike is not out of the question in the near future.

The eurozone is now closer than ever to meeting the ECB’s 2pc inflation target, following years of low rates and close to zero inflation.

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No inflation might sound good to consumers, but it can be an indicator of a stagnant economy, as it means consumers are not spending and wages are stagnating.

Higher interest rates across the world have stung the global and Irish economies.

Two international institutions – the OECD and European Commission – are now predicting a recession in the country this year, at least in the multinational parts of the economy, which tend to skew the data. Domestic sectors are expected to keep growing, although the recession could affect tax revenues, the OECD pointed out.

On the other hand, the OECD said lower interest rates could improve Irish growth, especially if the US economy keeps surprising on the upside, as it did in the third quarter.

But a tight labour market in Ireland means rising wages could drive inflation back up again.

Central Statistics Office data out this week showed average earnings grew by 4.6pc in the third quarter, compared with the same time last year, thanks to higher hourly pay rather than more hours worked.

While that is still lower than inflation, public sector wages grew faster, at 7.8pc. In the private sector, services, hospitality, health and IT saw inflation-busting increases.

“Outside of one quarter during the pandemic, this is the fastest annual rate of growth in the data going back to 2008,” said Goodbody chief economist Dermot O’Leary.

Source: Sarah Collins, Irish Independent 30/11/2023

Rising mortgage rates mean the savings that homeowners can make by switching their mortgage have doubled in the past six months.

Mortgage rates being charged by conventional lenders have breached the 7pc barrier for the first time in over a decade.

This means some households may be paying a record of up to €7,000 in extra repayments a year by not switching lenders, according to the latest Irish Independent/Doddl.ie mortgage switching index.

At the start of this year the maximum savings to be made from switching were around half the current amount, at around €3,590. Higher European funding costs have prompted a string of mortgage-rate rises from the main banks and the non-bank lenders.

The index is based on the average new mortgage drawn down in the last quarter of almost €300,631 and a highest roll-out variable rate of 7.15pc versus the lowest standard rate on the market.

The lowest non-green mortgage rate in the market is currently a three-year fixed at 3.85pc from Avant Money.

The 7.15pc rate is the one Finance Ireland customers are on coming off a fixed rate roll to when the fixed period ends.

Vulture funds are charging some of their customers even more, but do not offer new loans or facilitate switches.

The gap between the highest and lowest rate on the market is now 3.3 percentage points, the quarter three edition of the index shows.

Doddl.ie managing director Martina Hennessy said there are even cheaper rates available for those eligible for green rates or who have lower loan-to-values (LTVs).

Despite bigger savings to be made by switching, there has been a big fall-off in switching activity this year.

“People fear that they have missed the mythical boat, but the reality is that the repayment gap is widening, and it is now more important than ever to review your mortgage rate,” said Ms Hennessy.

“Fear of selecting the wrong options means that we do not act at all, and remain paying needlessly high rates of interest on our biggest outgoing.”

She said the pillar banks were initially slow to pass on rate increases, but this has changed and we continue to see rate increases throughout the market.

“The non-bank lenders, who were immediately impacted by rising funding costs, have more than doubled their rates in less than two years,” she said.

The Doddl.ie boss said the last time we had this higher-rate environment, between 2006 and 2008, people couldn’t switch as LTVs were dropping.

We are in the opposite place now and the homeowner’s hand is very strong, she said.

Due to property price inflation most mortgage holders rolling off fixed rates will have an improved LTV and will be eligible for lower rates due to their stronger position.

“With normal payback and in an increase in house values, even mortgage homeowners who purchased three years ago at 90pc loan-to-value may be below the 60pc threshold now and be eligible for sub-4pc rates,” said Ms Hennessy.

The mortgage adviser said it was important that mortgage holders question what interest rates are available on the market and not just settle for the rate offered by their existing bank.

She said the majority of those switching mortgage do so with the assistance of a mortgage broker.

Source: Charlie Weston, Irish Independent 6/11/2023