Friday, 5 August 2011

Euro Crisis To Freeze Mortgages...

Euro crisis to freeze mortgage rate for year...

HOMEOWNERS will be spared mortgage increases for up to a year -- but face heavy losses in the value of their pensions as markets plunged all over the world.

The deepening euro crisis means interest rates are unlikely to rise for another year -- a reprieve for those on tracker mortgages.

But the short-term relief could be seriously offset by the decline in the value of pensions and investments.

They were worth hundreds of billions less after all the main European markets crashed by between 3pc and 4pc.

US markets also closed well down - at 4.8pc - last night.

And there are fears even more losses could pile up later today.

The European Central Bank (ECB) left its key interest rate unchanged and gave no signal of an imminent rise at its monthly meeting in Frankfurt.

Markets reacted by betting there would now be no further rate rise until well into 2013 -- as the euro crisis means the ECB cannot raise rates due to the fragile global economic crisis.

Some market experts were even pricing in a slight chance of a rate cut over the coming months.

But while mortgage rises have been avoided, the financial markets are in such turmoil that the whole euro project is now being questioned.

Spain last night opted out entirely from the markets as it could no longer raise affordable funds.

Rates have risen twice already this year, hitting almost 600,000 mortgage holders, adding €60 a month to the cost of servicing a €200,000 tracker mortgage.

It had been expected there would be at least one more interest hike this year.

However, ECB president Jean-Claude Trichet signalled the market turmoil engulfing the eurozone had effectively ruled out another rise for a year.

He was cautious at a press conference in Germany, saying it was "extremely important" to continue tackling inflation. But he struck a softer note on the risks of future inflation, the trigger that typically spurs the ECB into rate hikes.

The scale of the market turmoil was such that some banks started charging people a fee for accepting their deposits. Bank of New York Mellon said it would charge clients a fee for leaving money for safekeeping.

Gold hit a new high as investors fled for the only safe havens available -- Swiss francs and US treasury bonds.

It now looks likely that a fresh EU summit will be needed to help resolve mounting problems for Italy and Spain.

The pressure on Germany to effectively 'save' the euro will intensify if Italy in particular gets into further trouble.

The poor state of the global economy means Mr Trichet has been forced to shelve his plans for interest-rate rises.

Mr Trichet usually refers to the need for "strong vigilance" on inflation in the month immediately before announcing a rate hike. This is normally preceded by warnings of rising inflation the month before that.

Yesterday, he merely said the ECB would continue to "monitor very closely" any signs that inflation was on the rise.

However, he stressed "uncertainty was particularly high", a veiled reference to the debt crisis that threatens to overwhelm Italy and undermine Europe's ability to rescue economies.

This uncertainty means that while financial markets are not pricing in any interest-rate rises for the next two years, the markets may be wrong.

A year ago, markets weren't pricing in any interest-rate rises for 2011. They only changed their tune earlier this year when Mr Trichet's language hardened ahead of April's rate hike.

Industry sources also point out that even if interest rates aren't driven up by the ECB for the next two years, banks may still choose to up their own rates as they try to rebuild their battered balance sheets.


The markets, where billions of euro are staked on the likely movements in interest rates, now reckon there will be no rate rise until June 2013 at the earliest.

KBC Bank economist Austin Hughes said there was now a slowly-dawning realisation within the ECB that raising interest rates would only worsen the eurozone's economic problems.

"Trichet expressed concerns for the economic outlook. And there was a sense of a crawling realisation of the problems the eurozone economy faces.

"These problems will be with us for some time, so the threat of an ECB rate rise is off the agenda for the foreseeable future," Mr Hughes told the Irish Independent.

However, other analysts warned the ECB would be unable to resist pushing up rates.

"The ECB seems largely undeterred by recent developments and keeps pointing to further increases in interest rates," Ernst & Young senior economic adviser Marie Diron said.

Report by Charlie Weston, Laura Noonan and Emmet Oliver - Irish Independent

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