ECB Cut Rates by 0.5% bringing the ECB base rate to 3.75%

ecb rate changeThe ECB rate change has given many of us a pleasant surprise, the ECB has cut rates by 0.5% giving a new base rate of 3.75%. For many of us that means new lower mortgage repayments (if you are on a tracker mortgage) for people on variables you will have to adopt a ‘wait and see’ approach because banks are not obliged to pass on the rate change. The pressure is coming down at least for now.

[Take note: this is not a ‘positive’ rate cut, it can have a positive result but the motivation behind it raises questions about the solvency and losses of major institutions as well as the threat of deflation.]

So, why would a bank opt to not pass on a rate reduction? Simply put, the income from many tracker mortgages does not cover the cost of funds that banks run on and therefore it would not make commercial sense to give people on variable rates the difference in value. Even if many try to refinance (which is increasingly difficult in this environment) the amount of people who don’t refinance will be more profitable to the bank, as well as that banks have to respect their battered shareholders and giving away profit is not part of that equation.

base rate cutThe Bank of England has also cut rates today as did the Federal Reserve the FOMC re-iterated many of Ben Bernanke’s sentiments when doing so. The Reserve Bank of Australia also reduced their rates by 100 basis points (that’s a 1% cut!) and the Chinese did the same.

So we are now thankfully seeing the governments and central banks of the worlds coordinating efforts towards a solution. This is a welcome development in how nations deal with international problems

Fed has already injected $1,000,000,000,000,000 (that’s 1 trillion) in credit and it hasn’t solved the problem which would tell me that firstly the bailout bill won’t bailout anything other than certain select groups and that we can expect a few things to happen:

Firstly there will be more inflation because the money being injected will dilute supply which the credit unwind will devour requiring more money, the injections won’t go on forever so you then turn to rate cuts. This will provide palliative care to battered economies but create upside risk on price stability, monetarists see rate cuts as a good fight against deflation but it didn’t work in Japan. One way of destroying debt is to inflate the problem away. It might also be ‘defaulted’ away!

central bankOn the economic front we are concerned about the ongoing implications of the interventions and monetary moves. Many people say that the recent intervention is not of concern due to our Debt GDP ratios, currently Ireland is in 85th place, behind such luminary economies as Moldova, Senegal, Uganda, Uzbekistan, and Equatorial Guinea. The one thing that brings me pleasure is the sheer volume of negative press means we are likely near the turning point, I’m awaiting the ‘Times’ signal (where you invest the day that Time magazine says ‘The end is nigh!’).

The issue of inflation is something to keep an eye on, it presents a strong argument for gold ownership and now more than ever people need to have good quality and timely financial advice, having a good broker advising you independently of the banks or insurance companies has never been more important.

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