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Will rate cut be passed on to consumers?

Jean Claude Trichet, president of the European Central Bank, announcing the latest cut in interest rates.

The European Central Bank announced that it was reducing its base rate by half of one per cent to 3.25 per cent. This came hot on the heels of the absolutely spectacular and unprecedented slashing of the base rate announced by the Bank of England of 1.50 per cent to three per cent.

While the ECB reduction must be applauded and is undoubtedly a massive step in the right direction, I remain both sceptical and reserved in my judgment of such initiatives on two counts. One concerns the fact that for the first time in history the ECB base rate is now greater than the Bank of England's which, therefore, begs the question: Did the ECB do enough with this reduction to fend off the dreaded possibility - more akin to probability - of a eurozone recession, which as predicted by experts is imminent? Should the European base rate be higher than the BOE's?

Second, and this is eminently more germane, can we be reliably assured that this cut in the ECB base rate will be passed on to the Maltese consumer, both in its entirety and with immediate effect, as experience has taught us that this, unaccountably, has not always been the case?

I call upon the relevant financial institutions to, for once, adopt and cultivate a less rapacious and grasping stance and embrace the seemingly alien concept of putting its customers' needs and requirements at the forefront of considerations by instantly passing on this cut in interest rates onto its very lifeblood, i.e. the client.

I also call upon our financial regulator, the MFSA, to monitor and scrutinise these financial entities as it is within their remit to ensure probity in such matters, for I cannot recall any such assistance or intervention in the past by the MFSA regarding similar scenarios. All these entities have a responsibility to enable the economy to get back on track and away from the current toxic financial quagmire we find ourselves bogged down in, through subscribing to the correct course of action necessary to be undertaken to alleviate the pressure on the consumer.

Finally, as stated, I fear that the ECB have only acted somewhat retrospectively out of fear of being perceived as feeble or dithering when robust and forthright decisions were called for. They have been far too conservative in their reduction of the base rate. Perhaps the latest move may prove sufficient to ultimately deter the shadowy presence of the grim reaper - or should that be grim repo - but I fear it will merely delay the inevitability of the fact that hell is coming home for Christmas!

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Comments

Joe Vella (on 9/11/08)
@ Peter Murray

ECB rate is to high compared to what?

Stephan Camilleri (on 9/11/08)
The ECB is going in a direction where zero interest rates are going to be the norm. It will be the greatest era to borrow money cheaply. This would start showing in May 2009. A case study is to look at Japan in the 1990s. They also had a zero interest situation. America is now following this path, which many experts say this is mistaken. What goes on in America will be followed by the ECB and the Bank of England. This is a scene for the possible future in regards to interest rates, and very probable.
PETER MURRAY (on 8/11/08)
DEAR JOE,

The only perspective to look at whether it be long,short,small or big is for the banks to onpass the FULL rate cut ASAP and each and every time .You state that last time the banks onpassed thie previous rate cut -check your reasearch sir ,as you will find this is only partly correct.Not only did the APS(our church bank)fail to onpass the full rate cut but they took 23 days to onpass a reduced reduction-only0.325% as opposed to 0.5%(from 08th Oct until 01st Nov.).Also the "big" banks demonstrated sloth in onpassing the rate cut..Are they so slow in onpassing the FULL rate when this increases?IN ANY EVENT WE ARE LOOKING AT THE SITUATION FROM A MALTESE CONSUMERS POINT OF VIEW AND THE ECB RATE IS FAR TOO HIGH AND OFFERS LITTLE COMFORT STILL TO BORROWERS.
Joe Vella (on 8/11/08)
@ Peter Murray

One should look at things from a long prespective.

last time the ECB cut rates, local banks reduce their rates.

One should point out that the BOE rate has been as much higher by as about 200 basis points then the ECB rate in the last 10 years or so.

For the last 10 years British residents have been paying about 200 basis points more for their mortgages and loans compared to the Euro zone.
Randolph Spiteri (on 8/11/08)
Of course not ... Here in Malta, as with everything else, the economy doesn't follow the rules ... How come interest rates promptly rise when the ECB or (pre-EU) the governer of the CBM announces the new higher rates, but they're not adjusted downwards or by the same amount when the interest rates are cut ??

Other countries are lowering the interest rates to 1 % to simulate business etc. In Malta what do we do? .. We raise electricity & water tariffs to further stunt consumer spending and business investment !

I thought when we joined the EU we were in for the good as well as the bad. It's not the case it seems.
A.gauci Cunningham (on 8/11/08)
I can confirm, like all the clients of one of malta's major banks who have a mortgage, that the interests have gone down and 2 weeks ago we received a letter informing us of this. Two days ago the ECB decided to reduce the interests again and we are 'eagerly" awaiting another reduction on interests!!

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