THE EUROPEAN CENTRAL Bank (ECB) has increased interest rates, for the eighth consecutive time, by 0.25% this morning.
This increases the ECB’s base deposit rate to 3.5% and could negatively impact those on tracker mortgages in Ireland.
The hike brings the interest rate to the highest it has been since May 2001.
In a statement from the ECB today, it said the latest hike “reflects the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission”.
“The Governing Council’s future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.”
The institution has increased its forecast for core inflation this year to 5.4%.
“Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labour market for the speed of disinflation,” the statement continued.
It now forecasts it reaching 5.1% this year, before declining to 3.0% in 2024 and 2.3% in 2025.
It has also lowered its growth projections for this year and next year.
It now expects the economy to grow by 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025.
Speaking to reporters following the announcement, ECB president Christine Lagarde said the institution is “not done” with its battle to bring down inflation, and will “very likely” raise interest rates further when its governors next meet in July.
“Unless there is a material change to our baseline, we will continue to hike at our next meeting. So we’re not thinking about pausing,” she told journalists
Lagarde said indicators of underlying price pressures remain strong, although some “showed tentative signs of softening”.
“Past increases in energy costs are still pushing up prices across the economy. Pent-up demand from the reopening of the economy also continues to drive up inflation, especially in services,” she said.
She also said that as the energy crisis fades, governments should “roll back the related support measures promptly” in order to avoid “driving up medium-term inflationary pressures, which would call for a stronger monetary policy response,”.
“Fiscal policies should be designed to make our economy more productive and gradually bring down high public debt.”
Lagarde also said that growth could be higher than projected if the strong labour market and receding uncertainty “mean that people and businesses become more confident and spend more”.
Eurozone inflation eased to 6.1% in May year on year, from a peak of 10.6% in October, mainly thanks to rapidly declining energy prices.
But core, or underlying, inflation — a closely-watched indicator that strips out volatile food and energy prices — decelerated only slightly to 5.3%, from 5.6% in April.
Managing director of online mortgage broker doddl.ie Martina Hennessy said yesterday the latest increase could “negatively impact affordability for even more tracker mortgage holders”.
We raised interest rates by 0.25 percentage points.
— European Central Bank (@ecb) June 15, 2023
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Hennessy said with the jump in tracker rates by 3.75% in less than 12 months, her brokerage expects today’s rate increase could bring this to at least 4%.
“This will add €505 in interest per month to an average tracker mortgage of €250k with a 20 year term or €540 if rates go up by 0.5%. Annually, that equates to a massive €6060 or €6480 respectively,” Hennessey said.
This afternoon, Bank of Ireland confirmed it would increase tracker mortgage rates for its customers by 0.25%.
“For most customers, this change will take effect from 5 July 2023,” the bank said in a statement.
“Customers don’t need to take any action right now. Bank of Ireland will write to all tracker mortgage customers confirming the new interest rate, the effective date, and their new repayment amount.
“The Bank continues to keep all rates under ongoing review and will clearly communicate any future rate change decisions at the appropriate time.”
Sinn Féin TD and the party’s finance spokesperson Pearse Doherty called on the government to introduce “temporary and targeted” mortgage interest reliefs yesterday, ahead of the hike.
Doherty said “it is time” that reliefs be brought in as the new hikes spell “another increase in their mortgage interest rates and costs” for many households.
“These rising costs are putting workers and families under serious financial strain, with many households now facing interest rates higher than eight percent.
“Already struggling with rising food prices and energy bills, this further interest rate hike is another blow.
“The Central Bank estimated in March that one in five households would have seen their annual mortgage costs rise by more than €4,800,” the TD said.
“This is a massive income shock, made worse in the context of a cost of living crisis.”
However, Darragh Cassidy of Bonkers.ie said the increase in lending rates Ireland has experienced over the last few months is now showing up in the Central Bank figures as of right now.
Cassidy said the state’s mortgage rates are still among the lowest in the Eurozone “for now at least”.
“This is because the main banks have been so slow at passing on the ECB rate increases to their mortgage customers,” Cassidy added.
Since July 2022, the ECB has increased rates eight successive times, by 3.75%, in an attempt to tackle rising inflation in the Eurozone.
Responding to a question posed by Doherty in the Dáil this afternoon, Housing Minister Darragh O’Brien said the reintroduction of a tax relief on mortgages “does need to be considered”.
“There is no question that there are families and individuals suffering because of the mortgage rate increases, but it can’t be done on an ad hoc basis, as you’ve suggested to deal with nearly every problem,” he said.
“The budgetary process is the most appropriate way to consider further action in respect of the cost-of-living challenge, and also in relation to increases in mortgage interest relief or introduction, should that be decided.”
He said there were “questions about fairness” over who would receive such relief and who wouldn’t and what levels they would receive it.
“Whilst tracker mortgage holders and some on variable rates have unquestionably been affected by higher payments, recent Central Bank research showed that having benefited from lower repayments over the years, the increases they have now faced move their repayments up roughly to the level of other borrowers.
“So fairness and equity is important in any measures that we would take.”
O’Brien also said Finance Minister Michael McGrath and other senior officials recently met with providers in the non-bank sector and raised concerns about the impact of recent mortgage interest rate rises on borrowers and the potential it may have to increase mortgage arrears.
“This is a real situation and Minister McGrath has been dealing with it,” he said.
“The Minister emphasised that it is a priority of Government to reduce mortgage arrears and noted that higher rates being charged by non-bank lenders act against achieving the objective.”
Hennessy said the outlook for the rest of the year for non-tracker mortgage holders could include further increases due to increases in funding costs for banks being “passed on to mortgage customers”.
“For those with less than a year to run on their current fixed rate contract, I would caution that they will find themselves rolling out of current fixed rate contracts into a very different rate environment,” Hennessy added.
“However the main banks have only hiked their fixed rates by around 1.5 to 2 percentage points on average. And variable rates have hardly moved at all,” Cassidy said.
Cassidy suggests that this decision has “come at the expense of savers” as saving rates are still “poor” – with the best rate available sitting at “just 2%”.
Cassidy said: “In essence, savers are subsidising mortgage holders. Whether that’s right will differ vastly depending on whether you talk to a mortgage holder or someone with big savings of course.”
Cassidy said while some of the higher rates are available for people in the Irish market today, he suggested the rates are “competitive” compared elsewhere in Europe.
Additional reporting from Jane Moore and © AFP 2023
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