ECB cuts rates: What does it mean for you?

The European Central bank has, as expected, cut interest rates.

It follows ten rate hikes over the past 23 months – and signals its belief that it is finally getting inflation under control.

But what does it mean for consumers – and are more cuts coming?

What are the ECB interest rates and what are they for?

The ECB has three interest rates – its main refinancing rate (also referred to as its fixed rate tender), its marginal lending facility and its deposit rate.

The fixed rate tender is what banks are charged when they borrow money from the ECB – which represents the most significant source of cash in the European banking system.

That means that it has a significant impact on what banks charge when they then lend that money out to other banks – and, ultimately, what banks charge regular consumers when they take out a loan.

How much have rates been cut by?

The ECB has cut its three interest rates by a quarter of a percentage point – or 25 basis points.

That means the fixed rate tender will fall from 4.5% to 4.25% from 12 June.

At the same time its deposit rate falls from 4% to 3.75%, while its marginal lending facility goes from 4.75% to 4.5%.

Does that mean my mortgage rate will fall too?

Not necessarily.

The only borrowers certain to benefit from this are those on tracker mortgages – where the rate the bank charges is pegged to the ECB rate.

That means that, in the coming weeks, they will definitely see their mortgage interest rate fall by a quarter of a percentage point.

According to Bonkers.ie, a tracker customer with €200,000 remaining on their mortgage over 10 or 15 years will see their repayments fall by around €25 a month.

That’s a €300 saving a year – though it would come on the back of a dramatic increase in their mortgage repayments since July 2022.

What about variable or fixed rate customers?

Banks are not obliged to reflect the lower rate in their variable or fixed rate offers, so it will ultimately be a business decision for them.

And it will likely take weeks before we know whether any of them cut their variable or fixed rate* offerings in response to the ECB move.

Taoiseach Simon Harris has indicated his desire to see banks pass rate cuts on to borrowers.

However in a statement Banking and Payments Federation of Ireland CEO Brian Hayes said Irish lenders here had only passed on some of the ECB’s ten rate increases to customers.

The indication clearly being that banks here moving in-step with the ECB was not a given.

BPFI said rates and pricing was a commercial matter for each individual lender in the market.

It also pointed out that lenders are legally prohibited from signalling any future price change.

*No matter what, existing fixed rate customers will have to wait until the end of their term before they see any change in what they pay.

Will rates fall further?

The ECB’s interest rates are undoubtedly far higher than the bank would consider normal – so more rate cuts will come eventually.

However how many more will be made this year is still unclear.

Market-watchers had previously suggested that there would be three rate cuts this year (including today’s), which would likely mean a further half a percentage point fall by December.

But the ECB has been extremely vague about what happens next, saying its future decisions would depend entirely on the economic data it was receiving each month.

Working on a “meeting-by-meeting basis” is a favoured term within the bank.

But for those hoping for rapid-fire rate cuts, there was some concerning data in the ECB’s decision today.

Alongside the rate cut it also raised its staff projections for eurozone inflation – signalling that inflation would take a longer time to fall to desired levels.

As of now, the ECB predicts the rate will not get back to its 2% target until 2026.

At the same time it upgraded its growth forecasts for the coming years.

This could also influence the speed at which it moves, as it would undermine suggestions that the ECB needed to cut rates in order to boost the region’s economy.

What about savers?

While much of the focus of the ECB rate cut is on borrowers, it can also have an impact on the amount savers can earn from their deposits.

That’s because a higher ECB rate helps to push up the amount banks can earn from the deposits they hold.

As a result the savings rates banks here offer could, in theory, also fall on the back of today’s decision.

But, much like with mortgages, banks are not obliged to pass ECB rate changes on to savers.

That has been blatantly apparent in the mis-match between the rates banks here charge on mortgages and offer on deposits.

It means that lenders here may opt to absorb any change in what they earn from deposits – rather than make a cut to the already low savings rates they generally offer.