THE EXPECTED HIKE in interest rates by the European Central Bank (ECB) won’t be welcomed by mortgage holders but may help “contain” house prices and bring down inflation, Tánaiste Leo Varadkar has said.
The ECB’s 25-member governing council is likely to lift its key interest rates by 75 points for the second consecutive time.
The institution is under pressure to rein in record-high inflation, driven by surging food and especially energy prices in the wake of Russia’s war in Ukraine.
Eurozone inflation stood at just under 10% in September, nearly five times the ECB’s 2% target.
ECB president Christine Lagarde warned recently that inflation was “far too high” and more action was required to prevent price shocks from becoming “entrenched”.
Speaking to reporters this morning, Varadkar said that he does anticipate a further hike in interest rates, which will not be welcome for either people seeking to borrow or mortgage holders.
“We actually do understand that this isn’t good news for people who have mortgages, but it will have other effects,” said Varadkar.
“It will help to bring down inflation for example, for pensioners will mean a better return on their savings and I do think we need to bear in mind those aspects of interest rate policy.
“It will probably also help to contain house prices and maybe even bring them down a bit.”
He added that the prolonged period of low interest rates “wasn’t normal” and that it has now “come to an end”.
Public Expenditure Minister Michael McGrath said that the Government would work to get “inflation under control” through fiscal management, while leaving the ECB to monetary policy.
However, when queried if he expected for house prices to fall, Public Expenditure Minister Michael McGrath said that he didn’t have a “crystal ball” and would not speculate on what direction they would go.
“I’m not going to speculate on what direction house prices will go because it’s such an important issue for so many people who are looking to buy and considering selling,” McGrath said.
He added that the Government acknowledged there would now be additional pressure on households with tracker mortgages, saying that once-off supports announced in Budget 2023 would be “even more important”.
Like other central banks, the ECB is fighting back with a series of rate hikes intended to dampen demand by making credit more expensive for households and businesses — at the risk of triggering an economic downturn.
“The 75 basis point rate hike looks like a done deal,” said ING economist Carsten Brzeski.
“The ECB has turned a blind eye on recession risks,” he added.
Balance sheet in focus
The ECB is also expected to use this week’s meeting to discuss bringing other monetary policy levers in line with its inflation-busting efforts.
Policymakers are likely to announce changes to the €2.1 trillion in super cheap, long-term loans (TLTROs) offered to banks in recent years to help the eurozone through several crises — sometimes at negative rates.
As a consequence of the rate hikes, lenders can now make an easy profit by parking their excess TLTRO cash at the ECB and pocketing the new, higher deposit rate — prompting policymakers to look for ways to incentivise early repayment of the loans.
The ECB may also ponder how best to shrink the €5 trillion worth of bonds on its balance sheet, after years of hoovering up government and corporate debt to drive up stubbornly low inflation.
But given the uncertain outlook and the risk of rattling financial markets, analysts say the start of any “quantitative tightening” – letting the bonds mature or actively selling them — is some way off.
“The recent events in the UK, which forced the Bank of England into a major U-turn on bond purchases, could be viewed as a useful reminder that any aggressive withdrawal of liquidity risks being highly disruptive for the bond market and the transmission of monetary policy,” said Ducrozet.
‘Kwasi Doherty’
Speaking in the Dáil this afternoon, Varadkar said he is aware that any increase in interest rates for mortgage holders “is going to be very unwelcome”.
“People who have tracker mortgages, in particular will receive a third letter this year, telling them that their mortgage payments are going up, and that is very much welcome for those of us who hold tracker mortgages,” he said.
“But the ECB’s rational as you understand will be that interest rates need to rise now in order to bring the prices bring inflation down.”
Sinn Féin’s Pearse Doherty TD called on the Government to introduce mortgage interest rate relief for homeowners, saying that the banks have said that the hike “will boost their interest income by another billion euro”.
“The Central Bank have told us that Irish banks will benefit most of all European banks as a result of the hikes. It’s not just about making excess profits, they need to do the right thing. We’re now in an almighty cost-of-living crisis, and the banks should do the right thing,” he said.
Doherty said that some banks haven’t passed on the first two interest rate hikes, and he said they need to do it for the third. “I make that call on behalf of Sinn Féin to the banks today,” he said.
“There has been mortgage interest relief in the past, it has been targeted, it was tailored, it was time-bound. Do you not believe it is now time to introduce a similar measure to deal with the shock, and this is a shock to many tracker mortgage customers that will see interest rate payments increase by €2,000,” he said.
“As you know, the Central Bank has done three interest rate hikes, they have signalled that they could do as much as five and there is expectation that there will be one early in the new year again.”
Varadkar responded by saying that he would love to introduce mortgage interest relief for those with tracker mortgages as he, and a “huge number of my constituents”, would benefit from it, but said he “can’t make those kind of promises”.
“We had mortgage interest relief in the past when interest rates were much higher than they are now. We now have a prolonged period of very low interest rates coming to an end. We’re seeing interest rates go back into something that would have been considered much more normal five or 10 or 15 years ago.”
He accused Doherty of “having learned nothing from what’s happened across the water”, referring to the UK’s economy following the controversial mini budget.
“You spent the last few months calling for a mini budget. After that, you called for a limitless energy price cap. You see how that turned out in the United Kingdom, and now you’ve another set of populist promises made to take advantage of people with tracker mortgages. Like when are you going to learn from what’s happened across the water?”
He said what the UK has done ”which they’re now reversing, was exactly what Sinn Féin promised”.
“I used to think it would take two years for Sinn Féin to wreck our economy. I think it would take one budget. One budget by Kwasi Doherty would do all the damage.”
Additional reporting by © AFP 2022 and Jane Moore.
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