Intesest Rates and the Eurozone Recession

MoominPapa

I've got a tracker mortgage so the current downward trend in interest rates is benefiting me greatly but the ECB can't cut much more, even if they do go to 0.
I'm interested in peoples opinons on how low will they go and what happens after recovery
What is likely to happen with rates if the Euro economy doesn't show signs of recovery in say 2 years?
Same for the World economy and in contrast if, by some miracle, things do pick up in 2 years? (Eurozone/World I mean - not Ireland that would take more than a miracle:pac:)

Personally I doubt the ECB will cut any more I think they won't see any point. Japan cut to in the early 90s 0 and was stuck at 0 for a decade , GBs more agressive cuts haven't worked same in the US.
But once the Eurozone comes out the other side and the ECB gets back to using rates as a means to control inflation Ireland could be screwed, again, as quicker recovery in other regions leads to higher rates while we struggle with, possibly, continuing negative growth and I go scrambling to find a fixed rate:P

flanzer

Doesn't ECB increase rate when inflation rises? With inflation running at just over 1% and looking like it will go nearer the 0% (with talk of deflation), I can't see the ECB increasing interest rates in the next 5 years. I'm not an Economist by any sort of the imagination and it's only what I'm observing.

<Fingers crossed>So they might have to go as low as 0% if inflation keeps going downward</Fingers crossed>

I was like yer man on the bus at one stage, not knowing what a traker mortgage was. I bloody do now, a thank god I never went fixed when the ECB were increasing rates in the middle of last year! It was more to do with my laziness in contacting the bank to arrange to go fixed

Économiste Monétaire

The ECB has a primary mandate of price stability, i.e. near 2% inflation over the medium term. If the Eurozone HICP (MUICP), based on the COICOP/HICP basket of defined goods, continues on a negative path it should lower rates, and possibly employ unusual actions to stimulate inflation; i.e. credit/quantitative easing. It has already switched to fixed rate tenders and massively increased the balance sheet. They're currently waiting for previous rate drops to take full effect, which is being prolonged by a messed up transmission mechanism. Overall, the money supply has remained pretty constant on the Eurozone front, but it has tanked for Ireland (y-on-y).

If you want a picture of what the ECB will do in the near-future, look to German, Italian, French HICP (and other indicators for them). Japan hit zero interest rate policy in early '01, and continued that, effectively, to mid '06. The problem of ZIRP is a liquidity trap, which Trichet believes will be difficult for the ECB to get out of, whereby banks don't lend the excess reserves. He hasn't ruled out credit/quantitative easing, but he signalled, at Davos, that it wasn't coming in the very short-term. The ECB can't purchase debt directly from governments, but it could follow the Fed path of buying up long-term government debt in areas with the largest spread between private sector credit rates and the minimum bid rate, to help bring that down. There's a problem with that policy, too, as some people are asserting that we have a bubble in Treasuries waiting to burst when a hint of upward inflation comes through.

I wouldn't agree about the Eurozone coming out of this very soon, nothing is positive, at the moment, for the countries I listed above. Lowering the rate to 1.5% seems a plausible outcome for the March meeting. It can help to ease the burden of highly indebted households (Ireland), and possibly stimulate consumption and investment.

MoominPapa

Thanks for that Économiste Monétaire.
If oil goes back to 140ish a barrell before the upturn, say because opec really slashes production could that cause enough inflationary pressure to force up rates?
Just saw McWilliams on Sky News floating the leave the Euro idea again. I presume if we did our own CB rate would start much higher ala Iceland. However my mortgage is a ECB tracker so presumably that shouldn't make any difference to my repayments and will leave my bank manager crying in his beer:pac:

Économiste Monétaire

MoominPapa wrote: »

Thanks for that Économiste Monétaire.
If oil goes back to 140ish a barrell before the upturn, say because opec really slashes production could that cause enough inflationary pressure to force up rates?
Just saw McWilliams on Sky News floating the leave the Euro idea again. I presume if we did our own CB rate would start much higher ala Iceland. However my mortgage is a ECB tracker so presumably that shouldn't make any difference to my repayments and will leave my bank manager crying in his beer:pac:

If oil prices go up dramatically, and that increase in the HICP isn't offset by a reduction in other sub-indices, then it's a safe bet that rates will go back up. Our central bank rate would be near irrelevant if we left the Euro, our currency would be, effectively, worthless.

MoominPapa

Économiste Monétaire wrote: »

Our central bank rate would be near irrelevant if we left the Euro, our currency would be, effectively, worthless.

Guess I'd have other things to worry about then:)

boardswalker

MoominPapa wrote: »

THowever my mortgage is a ECB tracker so presumably that shouldn't make any difference to my repayments and will leave my bank manager crying in his beer:pac:

In order to avail of Euro interest rates your mortgage must remain denominated in Euro. While your repayments in Euro terms would remain the same, in the new "Irish" currency the repayments would be much higher.

In the unlikely event that we left the Euro our currency would be devalued - that's one of benefits of leaving the Euro - therefore the cost in the new "Irish" currency of your mortgage repayments would increase equivalently. Unless you are paid in Euros you will have to sell Irish to buy Euro and that will cost a lot more.

foundation10

We are getting a further rate cut next month of at least .25% with a more likely rate cut of .5% The data coming out of the EUROZONE is pointing towards inflation at around 1% which is well below the ECB target of 2% which will mean that we can expect further rate cuts in the short term. I would anticipate that by the end of the summer we will have a base rate of 1.25% or lower. There is no risk of inflation reaching the highs we seen in 2008 in the short term, oil one of the main drivers of the eurozone inflation will not pose any threat in 2009 as the global demand will not exist for energy.