Borrowing costs for mortgage-holders look set to rise again after the European Central Bank (ECB) increased its main lending rate by another half a percentage point on Thursday.
The latest ECB interest rate hike, the fourth this year, means interest rates have now jumped from zero to 2.5 per cent in just six months.
Frankfurt also published a new set of forecasts, suggesting it expects inflation to remain above its 2 per cent target rate for the next three years, out to 2025, driven by a range of factors, including Russia’s invasion of Ukraine and the impact of pandemic-era stimulus.
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This is significantly longer than previous ECB forecasts and longer than markets are currently predicting, suggesting the bank’s fight against inflation is far from over.
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According to the latest flash estimate, euro-zone inflation fell from a record high of 10.6 per cent to 10 per cent in November.
The ECB has been raising rates at an unprecedented pace to rein in soaring prices, reversing a decade of ultra-easy monetary policy.
The latest increase was, however, less than the 75 basis-point hike announced in October, suggesting inflation across the bloc may be showing signs of peaking. Nonetheless the bank’s governing council said that, based on the substantial upward revision to the inflation outlook, it expected to raise rates further.
ECB chief Christine Lagarde said: “Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations. Our future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach,” she said.
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About 200,000 tracker mortgage holders here can expect to see an almost immediate increase in their mortgage repayments.
For those with €200,000 remaining on their mortgage, the ECB’s latest 0.5 per cent hike will add about €45 a month to repayments. However, when all increases since July are taken into account, the increase is about €220 a month or more than €2,600 a year.
“This is greater than the increase in the average energy bill we’ve seen over the past 18 months or so,” Daragh Cassidy of price comparison website Bonkers.ie said. “And the ECB is likely to raise rates again when it next meets in February. Although the increase may be smaller.
“Although the ECB’s move was widely expected, this is still probably the last thing tracker customers wanted to hear right before Christmas. Many are now looking at significantly increased repayments compared to only a few months ago,” Mr Cassidy said.
“Those on variable rates will also likely see an increase in their repayments over the coming week. The main lenders have not yet hiked their variable rates in response to any of the previous ECB increases. However, it’s hard to see this remaining the case for much longer,” Mr Cassidy added.
Since July, the ECB has raised rates by 2.5 percentage points. However, AIB has hiked its fixed rates by only one percentage point, PTSB has increased its fixed rates by an average of 0.45 percentage points and Bank of Ireland has hiked its fixed rates just 0.25 percentage points.
“Today’s news almost guarantees that all three lenders will hike their fixed rates again in the new year,” Mr Cassidy said.
In its announcement, the ECB also signalled it will begin reducing its €5 trillion stock of bonds, bought when it was trying to stimulate economic activity, which will make it more expensive for firms and governments to borrow.
“From the beginning of March 2023 onwards, the asset purchase programme [APP] portfolio will decline at a measured and predictable pace,” it said. “The decline will amount to €15 billion per month on average until the end of the second quarter of 2023.”
