TENS OF thousands of homeowners face the prospect of higher mortgage repayments as early as next month after European Central Bank (ECB) chief Jean-Claude Trichet signalled the bank’s first interest rate rise in almost two years.
The looming rate increase comes as the authorities grapple with an oil price “shock” due to the political turmoil in the Arab world. But Mr Trichet said it would be wrong to assume that any increase next month would be “the start of a series” of rate hikes. “We are in a posture of strong vigilance,” he added.
“My understanding of the position of the governing council . . . is that an increase of interest rates in the next meeting is possible,” he said.
The ECB reduced its key interest rate to a record low of 1 per cent in May 2009 in response to the fiscal crisis and its governing council has kept it at that level since then.
This has cushioned homeowners with tracker and variable-rate mortgages against tax increases and pay cuts, although some banks unilaterally increased variable loan rates as their fiscal position deteriorated.
Given the weak position of Irish institutions, it is a virtual certainty that they will pass on the likely increase in full to variable-rate customers.
Since the rate on tracker mortgages is contractually tied to the ECB rate, they too will rise for first time in almost two years.
Mr Trichet, who typically moves rates by 0.25 percentage points at a time, said it was “not appropriate” to speculate on the increase.
For every €100,000 owed on a 30-year tracker mortgage of 1.5 per cent plus the ECB rate, a quarter point increase would add €13.12 to monthly repayments. If the ECB moves next month, a person with a €300,000 mortgage will see monthly repayments rise by €40 or €480 annually. A person with a €400,000 mortgage will pay a further €52.50 monthly or €630 each year. Any increase would also have a knock-on effect on standard variable-rate mortgages.
Someone with a €300,000 30-year mortgage at a rate of 4 per cent would see a monthly increase of €43.50. People with standard variable-rate mortgages have already felt pain this year, with several banks announcing unilateral increases in recent weeks.
“We do not say present interest rates are appropriate,” Mr Trichet said. “I don’t exclude an interest rate increase . . . it is not certain; we take our decision when we meet and are never pre-committed.”
Meanwhile, oil prices are up 15 per cent since mid-February and food prices are also rising. The effect is pushing inflation above the ECB’s preferred “below but close to” 2 per cent.
With euro zone inflation at 2.4 per cent in February and projected to remain above 2 per cent for some time, Mr Trichet said it was “paramount” to keep it under control.
High inflation hurts the poorest the most, he said. “Particularly when we have a shock, and we have a shock, our responsibility is to prevent a second round of effects.”
Mr Trichet rejected suggestions the manoeuvre could undermine efforts to restore confidence in weak countries like Ireland, saying “non-standard” measures to support the banking sector remain in place.