Lingering effects of high inflation, a cost of living crisis – more general economic doom and gloom is likely not what the average Irish consumer wants to hear.

So there may have been alarm when Central Bank governor Gabriel Makhlouf warned of another possible European Central Bank (ECB) interest rate hike.

“I would not rule out the possibility that we have to go up another rung,” he said during the week.

The ECB’s main lending rate was raised 10 times over the last year or so to take it to 4.5%. Notes published of the ECB’s meeting from October also show that the organisation “should be ready for further interest rate hikes if necessary”.

The good news for consumers is that, while possible and despite the tough talking from officials, a further ECB rate hike looks increasingly unlikely, at least for the short term. Or at least, that’s what investors are betting.

Interest rates were primarily raised to deal with runaway inflation, where the annual rate of price increases spiked at about 10pc across in many European countries.

This came after Russia’s invasion of Ukraine sent energy prices surging across the continent.

The aim of the ECB’s rate hikes is to make borrowing money more expensive, dampening consumer demand and reducing price inflation. This has also had the knock-on impact of driving up Irish mortgage costs, with the average rate for new agreements rising from about 2.5% a year ago to just over 4%.

For someone at the start of a 25-year mortgage for €250,000, this difference means paying an extra €200 or so per month.

This increase led to a political backlash which resulted in the Irish government paying out €125m to mortgage holders, despite many economists criticising the move.

With cost of living pressures still very much present across the country, Irish mortgage holders will likely be relieved to hear that investors think the ECB is finished with the increases for the foreseeable future and are in fact predicting cuts.

This is because the primary goal of the ECB’s rate hikes was to cool down this inflation. Essentially, investors think the job is done.

The annual rate of inflation was 2.9% in October 2023, down from 4.3% just a month earlier in September 2023 and from 10% just over a year ago. Figures for November are due to be published next week, with the expectation that it will have fallen once again.

As the rate of inflation is coming down quickly and is near the ECB’s longer term target of 2%, investors are confident that further interest rate hikes won’t be needed. In fact, traders are now betting that the ECB will begin cutting rates as soon as April 2024.

However, from an Irish perspective there are two caveats here.

First, is that market confidence in rate cuts could backfire. The more investors bet on rate cuts, the more confident they are about spending money on assets such as equities, which has helped drive stock market rallies in recent months.

This is ironically the opposite of what central banks want. And Pierre Wunsch, the Governor of the National Bank of Belgium and an ECB governing council member, made it explicit: all the rate-cut bets could actually trigger the opposite, a rate hike.

He said the expectation of rate cuts has resulted in a “less restrictive monetary policy”, which may have to be “corrected” in the opposite direction.

This ‘monetary policy’ essentially refers to how much money is available in the economy – the market confidence means there’s more money flowing around than central bankers are comfortable with.

But even if there is another rate hike at some point in the coming months, with inflation as low as it is, it would likely be small and isolated.

So there’s a good chance the rate hikes are over. A win for Irish mortgage holders, right?

Mostly, yes – but this is where the second caveat comes in.

Even if the ECB is finished with its rate cycle, Irish mortgage costs could still rise in the coming months.

This is because of how slow Ireland’s banks have been to pass on the ECB’s rate hikes.

Despite the ECB raising rates by 4.5% since July 2022, the average rate for new mortgages in Ireland has only increased by about 1.5%.

This has been helped by how slow Irish customers are to move their money away from low-interest deposit accounts.

On a basic level, banks make a profit by taking in deposits, on which they pay interest, and lending out money, on which they charge interest. The difference between the two is what makes the banks’ profits.

As Irish consumers have mainly left their money in low interest deposit accounts, this has allowed banks to hold fire on increasing interest for mortgage customers.

But even with this being the case, there’s still a good chance Ireland’s banks could further increase their prices. 

Analysts have said Ireland’s banks could hike their variable and fixed rates by a further 0.50% over the coming months.

The ECB holding fire on more rate hikes is still good news for Irish borrowers. Further rate increases constantly raise the chance of higher mortgages.

But despite this, a few more price increases remain a very real possibility for homeowners.