Interest rates are set to rise across Europe from today. The move coincides with evidence that Irish people now owe a total of €247 billion.
The European Central Bank's governing council looks certain to increase its key policy rates by one quarter of 1 per cent when it meets in Frankfurt. This will prompt Irish banks to raise mortgage and personal loan rates.
The expected rate increases have prompted strong opposition from politicians and academics across the euro zone.
In the latest edition of its Monthly Bulletin, the ECB signalled in an editorial its concern about the effects on inflation of recent oil price increases, saying "recent increases in mainly energy prices have pushed headline inflation rates to levels significantly in excess of 2 per cent ... This suggests a more lasting impact of energy prices on overall price developments".
At a recent meeting, ECB president Jean-Claude Trichet said the bank remained ready to increase rates "at any time".
The remarks have been widely interpreted as signalling an imminent rate increase. Today's meeting of the ECB's governing council will be the first time it has met in a rate-setting capacity since those remarks were made two weeks ago. The ECB last raised interest rates in October 2000.
On Tuesday, the European Council of Finance Ministers expressed strong opposition to any increase in interest rates, while on Monday further opposition came from a panel of leading European economists.
According to a majority of the so-called ECB Shadow Council - a panel of leading European economists - a rise in interest rates could harm the European economy: "a narrow majority argued that there was not yet sufficient evidence in place to believe that the euro area economy was yet robust enough to cope with monetary tightening," according to summary minutes.
Further evidence emerged yesterday of the Irish economy's rising exposure to interest rates. The Central Bank of Ireland's latest credit statistics show personal credit grew annually by 29.4 per cent in October. This compares with an annual growth rate of 28.6 per cent in September. In the 12 months to last October, Irish people increased their borrowings by around €54 billion to a total of €247 billion.
In a sign that continued borrowing is affecting the housing market, the latest survey of house prices by the Permanent TSB and ESRI yesterday revealed house price growth is accelerating once more. "The overall value of house prices nationally rose by 6.8 per cent in the first 10 months of the year. This compares to an increase of 8.1 per cent over the same period in 2004. However, the rate of increase towards the end of 2005 is accelerating while this time last year price growth was slowing down," it said.
In a recent interview with The Irish Times, central bank governor John Hurley said he would be concerned about a resumption of strong growth in house prices.
Mr Hurley also said continued strong growth in borrowing was making the economy more exposed to possible interest-rate increases. But Bloxham stockbrokers predicted yesterday that the expected rate increases would have a limited impact on the economy.
"We think credit growth in 2006 will remain in the high teens and will only fall back to single digits if interest rates go up by 100 basis points or more", said Bloxham economist Alan McQuaid.
The expected rate increases will affect interest payments on fixed-rate as well as variable-rate loans. In preparation for today's expected rate increase, the Bank of Ireland and ICS last week increased interest rates on their fixed-rate loans by half a percentage point.
The three main policy rates of the ECB are the marginal lending facility, at which it lends to commercial banks; the rate on main refinancing operations, at which it conducts short-term operations; and the deposit facility, which is paid to depositors. The three rates - which stand at 3, 2 and 1 per cent respectively - have remained unchanged since June of 2003.