ECB cuts interest rates by 0.25%

The European Central Bank (ECB) has decided to reduce borrowing costs by 0.25%, with the move in line with what many analysts had expected.

This means that interest rates have dropped by 0.75% since June and indications are that the bank may be set to cut further at future meetings.

The bank said that the rapid drop in inflation and increasing concerns about the outlook for economic activity mean that a reduction in borrowing costs is warranted.

Head of investment strategy at Davy Paul Nicholson said that they expect interest rates to continue to fall and “are likely to finish around 2% by the summer of 2025 - and could go even lower”.

Unclear

For Irish consumers and farmers, it is unclear how quickly Irish banks will pass the reduction in rates on to borrowers.

Irish banks are not currently relying on the ECB for their funding needs, so their cost of lending will be unaffected by the drop in interest rates.

Banks are under no obligation to pass interest rates on to customers who borrow based on the bank’s variable rates.

For anyone on a fixed rate loan, there will be no change. Any company with a loan interest rate based off three-month Euribor plus a margin will see a drop in costs.

That being said, this move will be welcomed by investors and should help economic activity in Europe.

With Ireland’s economy already running at close to capacity - according to the Irish Fiscal Advisory Council - it is unclear whether extra stimulus will have a positive effect.