Eurozone rate cut could boost mortgage lending and give overseas investors more buying power

Weaker euro would benefit buyers paying in dollars, yen and renminbi

This article by OPP Connect editor Adrian Bishop is reposted with permission from OPP Connect.

Currency and financial experts believe the 0.1 percent cut in the European Central Bank (ECB) benchmark and the historic deposit rate reduction to below zero could weaken the euro, benefiting international homebuyers funding purchases of eurozone properties using other currencies like the dollar, yen and renminbi.

Euro vs. dollar image via Shutterstock.
Euro vs. dollar image via Shutterstock.

The ECB on Thursday reduced its deposit rate to -0.1 percent, meaning that commercial banks will have to pay to lodge their money with the central bank.

The ECB also cut its benchmark interest rate to 0.15 percent from 0.25 percent and imposed other measures to help banks lend more to small businesses and households.

Marc Morley-Freer, director of sales for Currencies Direct, tells OPP Connect the move could see a further fall in the euro, benefiting foreign buyers with stronger currencies. If quantitative easing (QE) follows, the property market could receive an extra boost.

Commenting on euro mortgage rates and lending, Morley-Freer says, “The move by the ECB should provide a boost to overall lending and to lending rates. Tracker mortgages will be the immediate beneficiaries, but there will be pressure for variable and fixed-rate mortgages to factor in the cut to the main interest rate to 0.15 percent.

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“In addition, the ECB has also strengthened forward guidance by stating that ECB rates will remain at present levels for an extended period of time in view of inflation — this should further encourage lending and lending rates to improve. Finally, the suggestion that QE could be next will be the icing on the cake in terms of liquidity for Europe — QE in the U.K. has demonstrated a notable boost to property lending.”

Looking at currency levels, after an initial fall the euro has managed to regain its composure in the short term. “However, the expectation that QE is still to come for Europe [while] the U.K. and the U.S. are on the path towards interest rate increases should weigh on the euro in the coming months. It is likely that negative interest rates will lead to the euro becoming more of a global funding currency for carry trades leading to euro weakness ahead.”

With possible lending relaxation the property markets should remain constant within Europe, but for overseas buyers these reduced rates could be harder to come by, he suggests.

“It is likely that the overseas buyer will see little, if [any], benefit from these cuts unless they already have a mortgage in place. What they will benefit from though is the continued strength of sterling and relative weakness in euro that could ignite the property market as buyers seek out bargains that look all the more affordable as their currency gives them more spending power.”

Charles Purdy, chief executive officer of Smart Currency Exchange, agrees that sterling’s boost against the euro has been very short-lived. “Having seen limited movement in sterling for most of the week, we then had a day of drama yesterday as the European Central Bank announcement at midday saw sterling gain nearly a cent against the euro in a very short period of time and then relinquish those gains during the remainder of the day. This just highlights how you need to be on top of your currency strategy and how you need to be ahead of the curve rather than hoping for the best.

“The euro has been sliding since March and the decision was much in line with what the market expected. There were no surprises here, and the forward guidance that ECB President Mario Draghi has been pushing since March seemed to have helped keep markets calm.”

Phillip Button, managing director of leading U.K. and overseas investment company, Brookes & Co., believes exchange rates will benefit U.K. buyers.

“Initially the rate reduction has strengthened sterling against the common currency (euro) so [it] should enable clients to purchase property in ‘Euroland’ at a cheaper rate. The rate late yesterday was 1.232 euros to the pound and is the strongest rate since January 2013,” he tells OPP Connect.

“In the longer run, the introduction by the ECB of a negative interest rate should boost the eurozone economies by stimulating growth and reducing unemployment, possibly leading to higher property prices in the eurozone.”

ECB President Mario Draghi says the whole package of measures is aimed at increasing lending to the “real economy.”

And Button adds, “Mr. Draghi said himself that the whole package of measures was aimed at increasing lending to the ‘real economy’ and it is naturally a little unusual given that ‘now we are in a completely different world.’ ”

The comments from the foreign exchange experts echo views from agents who told OPP Connect yesterday that the overseas property sector across Europe could benefit from the ECB decisions.

Negative rates are rare and it has been imposed only because of the weakness of the eurozone economic recovery and declining bank loans to the private sector, explained BBC World Service Economics correspondent Andrew Walker.

“The negative rate might encourage banks to lend more, but it also imposes a cost on them and so might affect their profitability. In truth, the impact is uncertain, so proceeding with this move does underline the ECB’s concern.”

Draghi also announced that long-term loans are to be offered to commercial banks at cheap rates until 2018, but will be capped at 7 percent of the amount each lends.


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