- Home
- News & Articles
- Interest Rate Falls May Be On The Cards
Interest Rate Falls May Be On The Cards
- By Debt Help Expert
- Published 9th August, 2008
- News & Articles
- Unrated
Debt Help Expert
Expert debt help and advice in Ireland. Personal debt help with budgeting and debt management problems.
View all articles by Debt Help ExpertInterest Rate Falls May Be On The Cards
However, it will probably be next year before the benefits come through, to judge from the cautious stance of the European Central Bank and analysis of a surprise drop in inflation last month. The cost of goods and services fell last month, leaving them 4.4pc higher than July last year. This was well down on 5pc price rises to June, and below forecasts of a 4.8pc inflation rate. Inflation will spike again this month -- and into the autumn -- as the impact of last month's rise in interest rates and large increases in gas and electricity prices feed through.
But falling food prices, as supermarkets launch a price war, and cheaper fuel may mean a damaging rise in inflation to above 5pc can be avoided. Economists say inflation could tumble in 2009, with Davy Research predicting it will be less than 2pc by this time next year. This is based on a weakening economy keeping prices subdued, further falls in energy prices, and possibly two cuts in interest rates in the first six months of the year.
Excluding mortgages, Irish inflation is already the fifth-lowest in the 27-nation EU, according to figures from the Central Statistics Office. But the size of Irish house-borrowings raises the basic 3.6pc inflation rate to 4.4pc. Growing hopes for cuts in mortgage costs next year, if realised, would have a dramatic effect on inflation.
As expected, the European Central Bank left rates unchanged at 4.25pc when its Governing Council met yesterday. But the mood changed, after ECB president Jean- Claude Trichet said growth is "particularly weak'' at present, and dropped July's description of "moderate, ongoing growth'', in the 15-nation euro zone.
"Trichet gave no indication that further increases are in the pipeline," said economist John Beggs at AIB Global Treasury.
"Two ECB rate cuts (to 3.75pc) in the first six months of next year will bring down mortgage costs, but we are assuming banks will not pass on the full benefit to borrowers," said analyst Rossa White at Davy Research. While mortgage costs had the biggest impact on last month's figures, food prices fell for the second month in a row -- something which last happened four years ago. Even more surprising was the first July fall in the cost of hotel rooms in the 11-year history of the statistics. Restaurant prices, which tend to rise by an average 0.5pc in July, were up be less than half that amount.
"It appears that the softer economy, not to mention the poor tourist season, is having an impact," said Pat McArdle, chief economist at Ulster Bank.
Employers, unions and analysts were quick to comment on the significance of the changed outlook for the stalled pay negotiations. "While this is a welcome development, it does not in any way affect our projection of 5pc inflation for this year," SIPTU general president Jack O'Connor said. "We had factored in some reduction this month but this will be reversed when the August figure emerges.
Fergal O'Brien, senior economist at the employers' group IBEC said inflation was set to fall and the increases had mainly been due to external factors of high food and energy prices,
"The annual cost of energy imports per household has doubled from €1,700 in 2004 to €3,400 in 2007, with further increases in 2008.
"This revenue has now left our shores and to attempt to compensate through inflation-linked wage increases would have long-term damaging consequences for our economy."
Pat McArdle said the Government was right to let the wage talks collapse, although he predicted a higher figure for next year than Davy Research.
"It looks like the average for 2008 will be around 4.7pc and next year's could be below 3.5pc," he said.
"The collapse of the pay talks is welcome," said Rossa White. "There is no basis for wage increases when the unemployment rate will soon be above 6pc."
But falling food prices, as supermarkets launch a price war, and cheaper fuel may mean a damaging rise in inflation to above 5pc can be avoided. Economists say inflation could tumble in 2009, with Davy Research predicting it will be less than 2pc by this time next year. This is based on a weakening economy keeping prices subdued, further falls in energy prices, and possibly two cuts in interest rates in the first six months of the year.
Excluding mortgages, Irish inflation is already the fifth-lowest in the 27-nation EU, according to figures from the Central Statistics Office. But the size of Irish house-borrowings raises the basic 3.6pc inflation rate to 4.4pc. Growing hopes for cuts in mortgage costs next year, if realised, would have a dramatic effect on inflation.
As expected, the European Central Bank left rates unchanged at 4.25pc when its Governing Council met yesterday. But the mood changed, after ECB president Jean- Claude Trichet said growth is "particularly weak'' at present, and dropped July's description of "moderate, ongoing growth'', in the 15-nation euro zone.
"Trichet gave no indication that further increases are in the pipeline," said economist John Beggs at AIB Global Treasury.
"Two ECB rate cuts (to 3.75pc) in the first six months of next year will bring down mortgage costs, but we are assuming banks will not pass on the full benefit to borrowers," said analyst Rossa White at Davy Research. While mortgage costs had the biggest impact on last month's figures, food prices fell for the second month in a row -- something which last happened four years ago. Even more surprising was the first July fall in the cost of hotel rooms in the 11-year history of the statistics. Restaurant prices, which tend to rise by an average 0.5pc in July, were up be less than half that amount.
"It appears that the softer economy, not to mention the poor tourist season, is having an impact," said Pat McArdle, chief economist at Ulster Bank.
Employers, unions and analysts were quick to comment on the significance of the changed outlook for the stalled pay negotiations. "While this is a welcome development, it does not in any way affect our projection of 5pc inflation for this year," SIPTU general president Jack O'Connor said. "We had factored in some reduction this month but this will be reversed when the August figure emerges.
Fergal O'Brien, senior economist at the employers' group IBEC said inflation was set to fall and the increases had mainly been due to external factors of high food and energy prices,
"The annual cost of energy imports per household has doubled from €1,700 in 2004 to €3,400 in 2007, with further increases in 2008.
"This revenue has now left our shores and to attempt to compensate through inflation-linked wage increases would have long-term damaging consequences for our economy."
Pat McArdle said the Government was right to let the wage talks collapse, although he predicted a higher figure for next year than Davy Research.
"It looks like the average for 2008 will be around 4.7pc and next year's could be below 3.5pc," he said.
"The collapse of the pay talks is welcome," said Rossa White. "There is no basis for wage increases when the unemployment rate will soon be above 6pc."