Mortgage rates are set to rise again after the European Central Bank (ECB) increased base rates to 3.5 per cent yesterday in a bid to ease inflation across the euro zone.
Irish lenders are likely to pass on the quarter of a percentage point rate rise to their customers within a week, although some institutions which have only recently raised rates in response to the ECB's last increase may delay their reaction a little longer.
Savers are likely to benefit correspondingly. British institution Northern Rock has already announced that it is passing on the benefit of the full increase to savers. It will pay an interest rate of 4.5 per cent on demand accounts.
Mr Aidan Clarke, head of mortgages at AIB, which still has a variable rate below 4 per cent, said the bank would move within the next 10 days. "But we are going to remain well priced in this market," he added.
The lenders insist they have no choice but to pass on the full amount of the rise, or close to it, if the bottom line of their businesses is not to be permanently affected.
They also insist they need to be able to attract savers who are increasingly being lured by stock market-based products.
Mr Martin Walsh, head of lending at EBS, said the ECB's decision underlined the fact that interest rates were on an upward curve. "Borrowers should make doubly sure that what they believe is affordable remains so into the future," he said. "They should leave a bit of a cushion."
In its statement, the ECB said euro-zone economic conditions were better than at any time in the past decade. Economic growth, the general weakness of the euro, oil price rises and excessively strong credit growth were all cited as reasons for the rate move.
Analysts expect another rate rise within months. Many predict the next hike will come in May, when the ECB will have a much clearer picture of the outlook for inflation than it does now.
Salomon Smith Barney is expecting another rate increase within two or three months, with rates rising to 4.5 per cent by the end of the year and to 5 per cent by mid-2001. Analyst Mr Jose Alzola warned that rates would rise even further and faster if the euro failed to recover significantly from current levels.
Interest rates have risen a full percentage point since last year but real interest rates, when inflation is taken into account, at 1.5 per cent are no higher than they were this time last year. In addition, the weakening of the euro, by boosting exports, has offset much of the tightening effect of the ECB's previous two interest rate rises.
According to IIB economist Mr Austin Hughes, the ECB's statement holds out a clear prospect of an imminent rise. It notes that the increase continues the policy of countering emerging upside risks to price stability in a timely and pre-emptive manner. Overall, its tone remained cautious with the statement saying most indicators and forecasts point to increasing upward pressures on consumer price inflation in the medium term.
Mr Hughes said the ECB would raise rates by another quarter of a percentage point over the next couple of months. "But if upcoming inflation data, wage developments, oil prices or the euro exchange rate disappoint that rise could be larger."
The euro weakened very slightly following the announcement. There is some division over whether the move will boost the currency over the longer term. According to Mr Aziz MacMahon, economist at Ulster Bank, the ECB's credibility will be enhanced. He attributed the softening in the value of the euro to the fact that the increase in rates was fully priced into markets by the time of the announcement.
Mr Jim Power, chief economist at Bank of Ireland, pointed out that the problem for the euro was that US interest rates were set to rise next week by the same magnitude as European interest rates.
