Morgan Stanley predicts ECB will raise rates to 1.25% in Q3 of 2011. Eamon Quinn reports
 
ECB president Jean-Claude Trichet: delayed raising ratesKey bank borrowing rates will start to rise here from next summer and will continue to climb by the end of 2011, Morgan Stanley has predicted.

The global investment bank forecasts the European Central Bank (ECB) will raise rates in the third quarter of 2011 by a quarter-point to 1.25% and they will continue to increase, leaving rates at 1.5% by the end of the year.

The rate increase will bring a sharp end to the cumulative 3.25% cut in rates the ECB has sanctioned since the start of the global economic and banking crisis. The central bank last moved in May last year when it cut rates by a quarter of a percent to an all-time low of 1%.

A rise in official rates will hit thousands of Irish tracker mortgage borrowers whose home loan repayments are pegged to ECB interest rates. Banks here have already dramatically increased their interest rates to home loan borrowers on variable rates.

In its latest global markets outlook, Morgan Stanley predicts other central banks, except for the Japanese central bank, will also start to increase their official interest rates next year.

Most dramatically, the economists predict the Bank of England will increase its key rate at the start of next year to 1% from 0.5%. British interest rates will then climb to 2% by the end of 2011.

Key interest rates in the US, now at only 0.125%, will start to rise too. The US Federal Reserve, which last cut rates in December 2008, will rapidly hike key interest rates to 2.5% by the end of next year, Morgan Stanley predicts.

Irish economists here also predict that the world’s central banks will start increasing interest rates.

Alan McQuaid, chief economist at Bloxham Stockbrokers, said the ECB will make its first delayed move to increase interest rates in the first part of next year.

“It has delayed raising rates because of the debt crisis, the banking liquidity crisis and because eurozone economies are still quite weak and there is no inflation risk,” said McQuaid. The ECB will start increasing rates by successive steps of 25 basis points (0.25%) in each quarter, he said.

McQuaid said this weekend’s gathering of leaders from among the world’s 20 largest economies will show up sharply the lack of consensus in the G20 about the best ways of tackling the world recession.

Austerity budgets that aim to cut government deficits below 3% of GDP by 2014 will do more harm than good, said McQuaid.

02 Dec 2009

European Central Bank governors meeting tomorrow are expected to leave their main interest rate unchanged at a record low of 1% while preparing banks for a gradual end to massive supplies of central bank cash.

ECB president Jean-Claude Trichet will carefully avoid suggesting that interest rates might start to climb before economic recovery is well underway, however. The debt crisis in Dubai will also hang over the meeting in light of possible repercussions in euro zone countries.

But analysts say that this week’s ECB meeting should bring the first steps towards a gentle backdoor exit from unorthodox monetary policies aimed at boosting economic activity.

AdvertisementThe 16-nation euro zone has emerged from recession with unemployment at 9.8%, its highest level since December 1998, and Trichet warns often that the economic climate remains uncertain.

ECB staff projections for growth are nonetheless expected to be revised upwards from the last estimation of a 4.1% contraction this year and 0.2% expansion in 2010.

Meanwhile, inflation is back in positive territory for the first time in seven months but likely to remain below the ECB target of just under 2%.

The ECB has held its main rate at 1% since May, above the US Federal Reserve’s rate of around zero and the Bank of England’s main rate of 0.5%.

The ECB has sought to boost bank lending by providing unlimited amounts of central bank cash at that rate, including record one-year loans of €442 billion in June.

08 Oct 2009 

THREE out of four mortgage holders have a variable rate mortgage, making them dangerously vulnerable to a rise in eurozone rates.

A new survey by the Central Bank shows that 80pc of homeowners with a mortgage either have a tracker or a standard variable rate loan.

Both of these types of variable mortgages are liable to hikes.

As soon as the European Central Bank (ECB) moves rates above their record low of 1pc, those with trackers will face a rise in repayments.

But people with standard variable rate home loans are vulnerable to rises irrespective of what the ECB does.

This is because lenders can increase standard variables whenever they want.

Permanent TSB has already upped its standard rate for existing customers, with other lenders indicating that they will follow suit.

The Central Bank study shows that 80pc of those with a mortgage have either a tracker or a standard rate mortgage.

This is up from 50pc in 1999, and Irish people have one of the highest proportions of variable mortgages in Europe, the paper by Central Bank economist Nicola Doyle entitled ‘Housing Finance Developments in Ireland’ indicates.

“There are 200,000 mortgage holders right now who are open to price rises at the whim of their lender,” mortgage broker Karl Deeter warned.

“Permanent TSB’s actions have already demonstrated that’s a real threat.

“As if negative equity and collapsing property values were not enough to contend with, they may also be forced to absorb higher profit margins which the banks want to charge in order to remedy their errors of the past.”

Mr Deeter said that most of the people in this situation were not aware of the threat and will not realise the risk until its too late.

However, there is no immediate threat of a rise in ECB interest rates, and economists believe they will be kept at 1pc until the third quarter of 2010.

The data is likely to add to European Central Bank caution not to withdraw its monetary stimulus prematurely when the ECB meets to decide interest rates today.

Economists believe the ECB will keep rates at a record low 1pc until the third quarter of 2010 despite signs the eurozone may have returned to growth in the third quarter of 2009.
Figures out yesterday show that the eurozone’s economy shrank more than previously thought in the second quarter of 2009.

This was because contributions from household demand and trade turned out to be smaller than initially estimated.

Gross domestic product in the 16-country area shrank by 0.2pc in the April-June period quarter-on-quarter and by 4.8pc in annual terms, compared with the previously reported falls of 0.1pc and 4.7pc, Eurostat said.

Irish Independent

The reduction will see monthly mortgage repayments on a standard €300,000 tracker mortgage over 30 years fall €39 to €1,154. The rate reduction is passed on automatically for all tracker mortgage holders.

Irish Life and Permanent, KBC Bank, Bank of Ireland and its subsidiary ICS, said this afternoon they would pass on the rate cut in full to owner occupiers with a variable rate mortgage.

However, Ulster Bank and First Active said they will not pass on the reduction to variable rate mortgage holders. The bank said its decision was “being taken in consideration of the needs of savers as well as borrowers”.

Ulster Bank, First Active and KBC did not pass on the 0.50 per cent ECB rate cut in April.

A spokesman for KBC said: “While there has been a sharp fall in interest rates since October, the effective cost of interbank money hasn’t precisely mirrored the rate reductions implemented by the ECB. Our rate change decisons have to take into consideration the totality of funding costs.”

The ECB kept its overnight deposit rate, which is acting as a floor for money markets, at 0.25 per cent, narrowing the gap between its policy rates instead of cutting the lowest of these to zero. The ECB also cut its marginal lending rate by 50 basis points to 1.75 per cent, from 2.25 per cent - keeping the rate corridor symmetrical. The new rates will take effect on May 13th.

ECB president Jean-Claude Trichet said the latest data and survey information suggested tentative signs economic conditions had stopped deteriorating.

“More recently there have been some positive signs … of stabilisation albeit at low levels,” Trichet said. “Overall, economic activity is going to be weak for the remainder of the year before gradually recovering in the course of 2010.”

The ECB’s quarter point rate cut, as expected, was coupled with steps towards quantitative easing, or the purchase of debt with new money created by the central bank.

The ECB said it could buy some €60 billion of covered bonds issued by companies in the euro zone and would lend banks unlimited funds for up to 12 months.

The European Investment Bank will also be allowed to gain access to ECB funding by taking part in the central bank’s money market operations.

After cutting interest rates less than expected at the last meeting, the European Central Bank’s leading members appear to be giving a clear signal over what the bank should do next.

In the latest interview, the governor of the Austrian central bank Ewald Nowotny said that the key interest rate should not go below the 1% level. This statement backs what other key ECB members have said over the past few weeks. Among them, the Vice-President of the European Central Bank said that the key interest rate could move somewhat lower, but in a “measured way”. Additionally, Axel Weber, which leads the Bundesbank, said that 1% is his personal bottom line.

Putting the pieces together, it appears that the ECB does not want to cut below 1%, even though the bank adopted a number of quantitative policy measures. “Despite having a much higher interest rate than the Fed, the money market rates in Europe are lower then in the U.S., and this gives the ECB more space to maneuver.” TheLFB-Forex.com Trade Team added.

“If the ECB decides not go any lower than 1% and MR. Trichet or any other of the voting members makes this official, the euro may find very strong support.” TheLFB-Forex.com Trade Team added. “The single currency might strengthen not only against the dollar, but against a whole range of currencies, especially against the pound” they said. “However, this would also have a side-effect, since the euro will gain ground against the Eastern European currencies, which are ready to sink in a pool of foreign denominated debt.”

TheLFB-Forex.com Trade Team notes “Since every other major central bank reached the lower limit of the monetary policy, the ECB policy measures are more important than ever for the euro’s valuation.” Keep an eye on what the ECB members are saying, you never know when the euro might take off”.

Monday, 30 March 2009