The European Central Bank will announce its latest interest rate decision on Thursday, October 17, with analysts increasingly expecting it to reduce rates by another 0.25%.

Since the last cut in August developments in inflation have shown that the pace of price rises has slowed more rapidly than previously forecast, leaving ECB interest rates far above what would be necessary for current economic conditions (see Figure 1).

Latest data from the CSO shows that annual inflation dropped to below 1% in Ireland in September, with prices actually 0.2% below the August level. Much of the drop in inflation has been driven by the reduction in energy prices.

While Irish banks have been slow to pass reductions in ECB rates on to households, another cut this week would increase the pressure on those banks to reduce interest rates on consumer loans.

For processors and corporations, the savings should be more readily realised as many company loans are linked to benchmark rates such as Euribor.

ECB rates

The key three-month Euribor rate has fallen in line with moves lower in ECB rates since June. A further cut on Thursday will mean an annual reduction in interest costs for corporations of €7,500 per €1m of borrowing since June.

For mortgage holders, there will be a saving for any people left holding a tracker-rate mortgage and possibly also for those on variable-rates, while those on fixed rates will see no change in monthly payments.

Farmers with variable rate loans may also see a reduction in loan costs, depending on what their loan is benchmarked against and how much of the cut their bank decides to pass on to borrowers.