September Set to See a Surge in Interest Rate Cuts As Per Central Banks

After months of speculation and initial moves from some central banks, September appears poised to mark a decisive shift in the interest rate landscape. This change could bring much-needed relief to hard-pressed mortgage holders, particularly those with tracker mortgages, who might benefit from a double round of rate cuts in the coming weeks. 

However, it’s a more challenging scenario for savers, as time may be running out to lock in attractive rates on deposits before they drop further.

Global Shifts And Actions By Central Banks

The Bank of England and the European Central Bank (ECB) were the first major central banks to cut rates over the summer, responding to a backdrop of falling inflation that had surged to levels not seen in decades. 

While inflation has shown signs of cooling in Europe, it remains more persistent in the US. Analysts argue that the Federal Reserve’s aggressive focus on bringing inflation back to its 2% target could be overly restrictive, posing potential risks to the US economy.

Recent data points to an economic slowdown in the US, sparking fears of an impending recession. This has fueled calls from various quarters for the Fed to implement a significant rate cut of half a percentage point in September. 

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Federal Reserve Chairman Jerome Powell hinted at upcoming adjustments during his keynote address at the annual Jackson Hole meeting of central bankers last week, suggesting that rate cuts are on the horizon.

“The time has come for policy to adjust,” Powell stated. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” While Powell’s comments signal an upcoming cut, the magnitude of the reduction remains uncertain.

Europe’s Central Banks Are Taking A Cautious Path Forward

Meanwhile, the ECB has been more reserved about its next moves. The bank’s chief economist, Philip Lane, recently emphasised that the ECB’s goal of returning inflation to its 2% target is “not yet secure.” Executive Board member Isabel Schnabel echoed these sentiments, highlighting the need for a gradual and data-driven approach to policy easing.

“The pace of policy easing cannot be mechanical. It needs to rest on data and analysis,” Schnabel noted, urging caution in the face of lingering inflation risks.

However, recent data supports the likelihood of another rate cut by the ECB. A ‘flash estimate’ released on Friday showed eurozone inflation easing to 2.2% in the year to this month, bringing it tantalisingly close to the ECB’s 2% target. Compounding this is the release of troubling economic data from Germany, the eurozone’s largest economy, which has further fueled speculation of imminent rate cuts.

Implications By Central Banks For Borrowers and Savers

For mortgage holders, the anticipated rate cuts offer a potential reprieve from the high borrowing costs that have characterised the past few years. Those with tracker and variable-rate mortgages, in particular, stand to benefit as rates decline. 

However, the flip side of these cuts is less favourable for savers, who have enjoyed higher returns on deposits during the period of elevated rates. As rates decline, opportunities for locking in favourable savings rates may dwindle, urging savers to act quickly.

What Rate Cut Can We Expect From Central Banks?

The European Central Bank (ECB) is widely expected to implement another 0.25% rate cut, which would reduce the ECB’s deposit rate to 3.5% and its main refinancing rate to 4%. 

For the average tracker mortgage holder, who experiences both the pain of rate hikes and the relief of cuts, this adjustment translates into modest savings of around €13 per month. However, for those on fixed or variable rates, the situation remains less straightforward.

Current Mortgage Rates: Fixed vs. Variable By Central Banks

Currently, the best fixed rates on the market start from approximately 3.45%, while some competitive variable rates hover around 3.75%. Hennessy suggests that locking in a fixed rate of around 3.5% for three to four years is a sound choice in today’s market. “If you can get a three or four-year fixed rate in or around 3.5%, it’s a solid rate,” she noted. This advice resonates with many mortgage holders who prioritise stability and security over the uncertainty of variable rates.

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“Most mortgage holders like security. They don’t like to speculate,” Hennessy explained. This preference underscores why fixed rates remain popular despite the potential for future rate cuts. Borrowers value the predictability that comes with fixed rates, allowing them to budget their finances without the fear of sudden increases. As mortgage rates ease and deposit rates potentially peak, the key for savers and borrowers alike is to stay informed and responsive to market shifts. With the ECB poised to influence rates further, the coming months will be crucial in determining the direction of interest rates and the financial strategies that will prove most beneficial for consumers.