Irish mortgage holders could be in for a bumpier-than-expected ride over the next few months, with European Central Bank (ECB) governing council member Klaas Knot predicting bigger interest rate hikes than had been anticipated.
He said several half-point increases in interest rates could be needed if inflation worsens — indicating a possible move of that size in September may not be a one-off. Consumer price inflation in the euro zone now tops 8 per cent.
Frankfurt indicated earlier this month it would begin a series of interest rate increases from next month, beginning with a quarter-point rise on July 21st, the date of its next meeting. Markets have priced in 135 basis points of hikes by the end of this year, or an increase at every meeting from July, with some of the moves more than 25 basis points.
However, Dr Knot, an ECB hawk who was the first governing council member to float the idea of a hike above the usual quarter-point, indicated that he thinks 200 basis points or two full percentage points of hikes are needed over the next several months to rein in inflation.
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Mortgage broker Michael Dowling of Dowling Financial said a move of that magnitude would add €335 to the monthly repayments on a typical €300,000 mortgage and €670 for a €600,000 mortgage. Rising mortgage costs are likely to intensify the current cost-of-living squeeze alongside surging energy, transport and food prices.
“Those with trackers will see an almost immediate increase in their repayments when the ECB raises the lending rate. This is likely to be September but could be July,” said Daragh Cassidy, head of communications at price comparison website Bonkers.
“The first 0.25 per cent increase to the lending rate might be absorbed by some of the banks. But it’s likely everyone will be facing higher rates before the end of the year,” he said.
The ECB’s counterparts elsewhere are well under way with tightening monetary policy, with the Federal Reserve this week raising rates by 75 basis points — the most since 1994.
Speaking earlier this week, Dr Knot’s colleague on the governing council Pierre Wunsch called the first 150-200 basis points of rate increases “no-brainers because real rates would remain negative in the short term.
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As long as the ECB doesn’t see inflation “coming down, we are going to have to increase more. While there’s no agreement on the pace of hikes after September, policymakers have shown they’re open to bigger steps, the Belgian official said.
One potential obstacle to ending years of ultra-loose monetary policy is unwarranted jumps in the government bond yields of euro zone member states — so-called fragmentation. Following a recent sharp sell-off in Italian debt, the ECB held an emergency meeting on Wednesday at which it decided to speed up work on an anti-crisis tool.
It’s important for the ECB to have an “effective instrument to combat such market turmoil, governing council member Gediminas Simkus said on Friday. — Additional reporting: Bloomberg
