Rising mortgage rates to keep inflation higher for longer, warns competitiveness council

The increasing number of fixed-rate mortgage customers in Ireland who will be forced to reset payments at higher interest rates could ensure inflation remains higher for longer, the National Competitiveness and Productivity Council (NCPC) has warned.

In a new report assessing Ireland’s inflation journey to date, the council said rising mortgage interest rates had overtaken energy prices as the chief driver of price growth here.

“Recently, upward pressures on energy prices have dissipated but mortgage interest rates have moved ahead due to continued interest rate increases set by the European Central Bank,” it said.

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In May last year, the council noted that energy costs had risen by 56 per cent year-on-year compared to just a 4 per cent rise in mortgage interest repayments.

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“Just one year later, the equivalent figures were 16 per cent [for energy] versus 44 per cent [on mortgages] as energy price pressures began to ease but the tightened monetary policy stance began to feed through to consumer prices,” it said.

It warned that the current high rate of inflation — it was 5.8 per cent in July — may not come down as quickly as several forecasters, including the Department of Finance, are predicting because of higher mortgage repayments and other factors.

It noted that about 60 per cent of mortgage customers here are insulated from interest rate rises on account of their fixed-rate contracts However close to 10 per cent — or 56,000 mortgage customers — “will roll off their current fixed rate by end-2023 and will face the prospect of higher repayments [followed by a further 10 per cent by end-2024]”.

This would affect the Consumer Price Index (CPI), from which the State’s inflation rate is derived, it said.

Other factors will also likely keep inflation higher than the current forecasts, it warned, including higher food prices linked to adverse weather conditions globally and domestically.

“In addition to developments such as recent global heatwaves, the collapse of the Nova Kakhovka Dam in Ukraine and the uncertainty surrounding the agreement that facilitated Ukrainian grain exports have increased concerns regarding food security and prices (and consequently, global inflation expectations),” it said.

These issues are compounded by heavy rainfall in Ireland and Britain which will reduce yields for cereals and other crops.

Developments in the housing market also have the potential to sustain inflation over the short to medium term, it said.

“For instance, the continued upward price pressures in the rental market – and associated supply issues across the residential property sector – will likely continue to feed through into the CPI,” the council said.

Core inflation

In its report, the NCPC noted that core inflation, which strips out energy and food prices, has “remained persistent”

“The classification of core/noncore is based on the notion that food and energy are subject to various atypical shocks which are considered to be temporary, ranging from weather events, such as harvest failure, to decisions by international cartels, such as Opec,” it said.

“However, emerging factors such as climate change, geopolitical disruption/conflict and any retrenchment in terms of recent patterns of globalisation may require some redefinition of what we mean when we refer to the temporary nature of these shocks,” it said.

The council’s inflation assessment report comes in advance of its annual competitiveness challenge report, expected in September, which outlines the wider price pressures facing the Irish economy.