Are interest rates about to be cut again?

The time has come around for the European Central Bank's decision makers to meet again to ponder monetary or interest rate policy.

On Thursday they will gather in Slovenia for their latest consideration of the European economic environment.

How likely is it that the ECB will trim rates on Thursday?

Following two years of rising and record high rates in order to tame inflation, the ECB has cut rates twice so far this year.

In June it sliced the key deposit rate, which is the one that most lending is linked to, by 0.25%.

And in September, it did the same, although on that occasion a technical change to a separate ECB rate that tracker mortgages are pegged to meant borrowers with those benefited from an additional 0.35% reduction.

Market watchers now think that a further 0.25% cut will follow this week.

A poll of economists by Reuters last week found 90% back this position and think a similar level of reduction will follow at the following meeting of the Governing Council in mid-December.

That’s up from just 12% of economists polled in September - so there is a strong consensus around the position.

Why the sudden change of opinion?

Two reasons really. First, last week the eurozone inflation figure for September came in below 2% for the first time since mid-2021, settling at 1.8%.

That was lower than had been expected, given experts further optimism that progress continues to be made in reducing runaway price growth, leaving the door open for rates to come down more.

They had already been buoyed by hints dropped a few days earlier by ECB President Christine Lagarde.

"The latest developments strengthen our confidence that inflation will return to target in a timely manner," she said.

"We will take that into account in our next monetary policy meeting in October."

The position is also strengthened by a string of weaker than hoped for economic data from the euro area.

Eurozone business activity contracted sharply in September, with the services sector flatlining and an acceleration in the rate of at which the manufacturing sector was slowing.

The declines were particularly noticeable in Germany and France, the powerhouses of the European economy.

At nearly 6%, unemployment in Europe is at a record low, but still elevated by international standards.

In the second quarter of the year, the eurozone economy grew by just 0.2% when measured by GDP, following 0.3% in the first quarter.

And official ECB forecasts predict GDP will remain around those subdued levels for the remainder of the year.

So additional stimulus through the further cutting of rates to boost investment and spending is likely to be the result.

Will that mean that my mortgage will become cheaper?

Not necessarily unfortunately - at least in the short term - unless you have a tracker.

The 130,000 tracker holders will automatically benefit from any reduction, as is the norm.

But other borrowers will have to wait to see if the banks and other lenders pass on the reduction to them through.

So far they’ve been slow to do so. There has been some trimming of rates in response to the June and September cuts, mostly to fixed rates.

The latest data from the Central Bank though, which was released on Friday, shows that overall rates remain pretty elevated.

In August the average interest rate on new Irish mortgages was unchanged for the third month running and stood at 4.11%.

It means that the average cost of a new mortgage in Ireland remains the sixth highest in the euro area, at 40 basis points above the average for the bloc of 3.71%.

Since the start of the year, average new mortgage interest rates here have only dropped by 0.16% - not a lot considering the ECB has pared 0.50% off its rates.

Irish-based lenders appear to have taken a view that because they didn’t rush in putting rates up when the ECB was hiking them and didn’t pass the full increases on to all their customers, they will take their time cutting them again on the way back down.

Does the same go for savings rates?

Well in theory it should. And there have been no high-profile announcements from the banks that they are cutting deposit rates, as you might imagine.

But the Central Bank data does show that in August, the average interest rate offered on household deposits with an agreed maturity - so term deposits - fell by 15 basis points compared to July, to 2.62%.

This compared to an average rate across the euro area of 2.96%.

Term deposit rates are still marginally higher than they were in January - but not by much.

And it is notable that they fell in August, especially considering the gap with the European average.

While overnight deposit rates remain stuck at a paltry 0.13% - the same average rate as in January.

"Some consumers are beginning to move toward accounts where they will get a better return but savers still hold a gigantic €137 billion in such poor value accounts, which should only really be for emergency situations," said Rachel McGovern, deputy chief executive of Brokers Ireland.

That is why, if you have some money and can put it away for at least a little while, it is worth looking around at what is on offer.

For example, Raisin, the online marketplace for savings products across Europe, shows rates of up to 3.45% are on offer from some institutions outside of Ireland, which can be accessed from here.

Rate cuts are good for me, but what about the economy as a whole?

For the reasons I outlined earlier, the European economy taken as a whole could use a bit of a boost in the form of a further interest rate cut to get things moving a bit stronger.

But here in Ireland, the economy is ticking along quite nicely.

In the Budget the Department of Finance forecasted that the domestic economy would expand by 2.5 % this year and 2.9% next year - all pretty healthy.

The Government also announced what commentators described as a giveaway package of one-off "cost of living" measures, spending increases and tax cuts, which will begin to kick in within weeks.

That could inject a further shot of adrenaline into an economy already running at pretty much full capacity, with a tight labour market, rising incomes and strong consumer spending.

Add in a couple of additional interest rate cuts this week and in December and the risk is that the situation starts to become frothy, potentially driving inflation higher again, just as it is settling (the annual rate of inflation in September was 0.7%).

Nowhere is that likely to be more apparent than in the property market.

According to the Central Statistics Office, nationally prices in the year to the end of July rose 9.6% and compared to June were up 0.5%.

That’s the highest annual growth rate in 21 months, driven in part by the ongoing shortage of supply, but also by strong demand as wages rise and interest rates fall, boosting affordability.

And that’s before the effects of the September and possible subsequent ECB interest rate cuts are even accounted for.

So while many will be hoping Ms Lagarde will deliver further good news on Thursday, it might also be a case of be careful what you wish for.