ECB rates move poses some tricky questions for Government

Being a fly on the wall at the latest European Central Bank (ECB) council meeting would have been interesting.

A group of more hawkish members were seeking a half point rise. Some caution prevailed, however, with a quarter point rise announced.

In an apparent move to help to mollify the hawks, the ECB also announced that it would run down its holdings of Government bonds a bit more quickly, putting a bit more upward pressure on longer-term interest rates. It will hope that this does not add to jitters in the banking market.

Part of the compromise was a message from ECB president, Christine Lagarde, that more increases on are on the way. There is still “more ground to cover,” she said, adding that the ECB was “not pausing – that is extremely clear”.

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This put some clear water between the ECB and the US Federal Reserve, where chair, Jay Powell, hinted on Wednesday that US interest rates could have peaked.

All eyes will now turn to inflation figures in the euro zone in advance of the next ECB meeting. The uncertainty for the ECB is that there is a significant time lag before the full impact of higher interest rates takes effect – and so, it does not know how far the increases already in place will reduce inflation.

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Any sense of discipline on the ECB board in terms of public commentary has long since disappeared so different council members will be out arguing their case about what should happen next. Europe’s politicians are also likely to increasingly join the fray, while ostensibly respecting the ECB’s independence.

Lagarde, getting her retaliation in first, told politicians to reduce cost of living supports to households and so, cut demand and lower inflationary pressures – if not, her message was, interest rates increases would need to be larger.

For Ireland, where growth is strong, the economy overall will manage with higher interest rates, though they could have some impact on consumer demand and investment.

A group of borrowers are being hard hit and political pressure is growing to “do something”, with Sinn Féin leading the charge for a targeted and temporary return of mortgage interest relief.

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This is tricky for the Government for a number of reasons. One is that temporary measures can quickly become semi-permanent.

Second, while tracker mortgage holders and some on variable rates have suffered most from higher repayments, recent Central Bank research showed that, having benefited from lower repayments for many years, the increases they have faced have now moved their repayments up roughly to the level of other borrowers.

So, there are questions of fairness in terms of who gets help and who does not.

The ECB would also argue that such relief is damaging the pass through of policies to bring down inflation – this may not count for much in the Irish political debate.

More cost of living measures and help for households is a nailed-on certainty in the budget, despite Frankfurt’s protests, but whether there will be specific measures aimed at mortgage holders remains to be seen.