BY JOHN ELLIS, FINANCIAL ADVISOR
The European Central Bank (ECB) has once again lowered interest rates, cutting them by a quarter of a percentage point for the second time this year which will have an immediate impact on both borrowers and savers across Ireland. As the ECB tries to take a balanced view between controlling inflation and encouraging economic growth, the implications of these cuts “reveal a complex economic landscape that cannot be ignored”. Unfortunately, the immediate reaction may be positive for many, but the long-term consequences are far from beneficial.
• For mortgage holders, especially those on tracker rates, the news comes as a welcome relief as the cut will reduce monthly repayments. For example, someone with €200,000 remaining on their mortgage could see their monthly repayments reduce by approximately €25 and, with further reductions due in December, borrowers can expect added savings before the year ends.
• In fact, the ECB is expected to introduce a further technical adjustment later this month, reducing the spread between its refinancing rate and deposit rate by 0.35% which will directly affect tracker mortgage holders. In addition, variable and fixed-rate mortgage holders are likely to benefit, whenever the banks consider it fit to follow the ECB’s lead by cutting their own rates in the coming weeks.
• Pity the savers though. As with every economic policy there are winners and losers, savers will face a quite different reality. Many who rely on interest from savings are watching their returns dwindle. Already, N26, the German online bank, has lowered rates by as much as 1.1% with more reductions to follow. Though competition for deposits among banks could prevent a total collapse in savings rates, savers must act quickly if they want to secure the higher rates while they are still available.
• Beyond the world of mortgages and savings accounts, Irish consumers continue to grapple with the persistent cost of living pressures, despite recent dips in inflation. Although inflation has finally fallen below 2% for the first time in over three years, prices are still high, and families are still feeling the effects of years of soaring costs.
• With winter approaching, the rising cost of energy is particularly concerning even though some suppliers have recently reduced their prices, the Public Service Obligation (PSO) levy for example is set to increase from October 1, adding another €42.25 annually to electricity bills.
• Adding to these burdens is the Government’s decision to raise the carbon tax on petrol and diesel starting October 9. This increase will hit consumers hard at the pump, further straining household budgets. The government has hinted at extending the reduced VAT rate for gas and electricity in the upcoming budget, but it will do little to ease the broader pressure of rising energy costs. The current 23% VAT rate on everyday goods and services, such as car tyres, continues to weigh heavily on consumers.
• While the ECB’s interest rate cuts provide immediate relief to borrowers, the wider impact on savers and the ongoing pressure of living costs cannot be overlooked. The upcoming Budget will need to focus on easing these burdens if real progress is to be made. Interest rate cuts may offer short-term gains, but without meaningful government intervention households will continue to struggle under the weight of runaway prices.
• A review of high VAT rates is long overdue, and without significant reform, the cost-of-living crisis will persist.
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