The European Central Bank (ECB) raised its main lending rate to 4.25 per cent on Thursday, marking a ninth straight increase in 12 months, as it continues the most aggressive series of hikes in its history amid its fight against inflation.
The latest 0.25 of a percentage point increase was in line with what economists had expected. The ECB’s governing council has “an open mind” as to what rate decisions it will take in September and subsequent meetings, the organisation’s president, Christine Lagarde, said at a press conference.
Ms Lagarde said that decisions from now on may vary from meeting to meeting, depending on the most recent inflation data.
“The developments since the last meeting [in June] support the expectation that inflation will drop further over the remainder of the year but will stay above target for an extended period,” the ECB said in a statement. “While some measures show signs of easing, underlying inflation remains high overall.”
While headline euro zone inflation fell to 5.5 per cent in June from 6.1 per cent a month earlier and a peak of 10.6 per cent last October, core inflation – which excludes volatile items such as energy and food – actually rose slightly to 5.5 per cent, according to Eurostat, the EU statistics agency. The ECB inflation target is 2 per cent.
The rate increase heightens the pressure on borrowers, many of whom are already grappling with repayments that have increased by hundreds of euro over the past year and the wider cost-of-living crisis.
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Each quarter-point increase adds about €25 to monthly repayments on a tracker mortgage with a 1 per cent margin over the ECB rate and has €200,000 outstanding, according to Daragh Cassidy, head of communications at Bonkers.ie.
Irish banks have largely lagged euro zone peers in passing on rising ECB rates to mortgage borrowers, effectively using low deposit rates for savers to subsidise their loan books.
While banks have been increasing rates on certain personal deposit products to as high as 2 per cent in recent times, more than 90 per cent of retail savings are in on-demand and current accounts, which were earning an average rate of 0.04 per cent in May, according to Central Bank data.
The ECB’s move on Thursday to also increase its deposit rate by a quarter-point to 3.75 per cent means that the three surviving Irish banks – AIB, Bank of Ireland and Permanent TSB (PTSB) – are now earning an annualised €2.25 billion of interest on an estimated €60 billion of excess deposits they have stored with the central bank.
The central bank did not offer any guidance on the future path of interest rates, other than to say that “decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to the 2 per cent medium-term target”.
The US central bank, the Federal Reserve in Washington, raised its main interest rate by a quarter point on Wednesday to a range of 5.25 per cent to 5.5 per cent, leaving it at levels last seen 22 years ago.
“This 0.25 per cent increase is bad news for tracker mortgage holders in particular, with a further increase possible in September,” said Martina Hennessy, Managing Director of digital mortgage platform doddl.ie.
She noted that over the last year tracker rates have jumped by 4.25 per cent, adding €540 in interest per month to an average tracker mortgage of €250,000 with a 20-year term.
“These incremental increases have already prompted many people to relinquish their tracker and secure their repayments with a fixed rate product.
“If the ECB refinance rate hits 4.5 per cent by the year end, this would bring the average tracker rate to 5.65 per cent.
“Those who remain on tracker are keenly watching for indications of rate falls in early 2024, but it is unlikely there will be a return to the days of a 0 per cent ECB rate in the lifetime of their mortgages.”
She said that the pillar banks, who hold the lion’s share of the market and seek funding on European money markets “are also seeing an increase in their funding costs which they will inevitably pass on to customers”and she warned that people “rolling out of fixed rates will experience a significant increase in repayments overnight which could leave many struggling with affordability if they do not plan and get advice.”
Brokers Ireland said it was “not at all confident that the strategy will achieve stability rather than fragility and destruction among borrowers – personal and business borrowers.”
Rachel McGovern, the group’s director of financial services said it would “pile a lot more pressure on borrowers” adding that it was “notable that many economists are now questioning the ECB strategy, whether or not the 2 per cent inflation target is justifiable, if it should be increased, and indeed if the strategy is outdated or appropriate to today’s changed market.”
She said there were in the region of 315,000 tracker mortgage and variable rate mortgage holders, and 400,000 plus mortgage borrowers on fixed rates, of which more than six in ten are fixed for less than three years.
Many of the latter group will be exiting these fixed rates in the near future and will be “coming out into a challenging higher interest rate market at a level they would never have anticipated,” she said.
“Unfortunately not enough borrowers availed of the excellent long-term fixed interest rates available in the market a year ago, many of which have since been withdrawn by lenders,” she said.
Trevor Grant of the Association of Irish Mortgage Advisors. noted that it is “now exactly a year since the ECB first started to increase its interest rates”.
He said that for most of those with tracker mortgages, the 0.25 percentage point increase in the ECB rate will push up mortgage repayments by €25 per month or more though the impact of the latest rate rise on mortgage bills will depend on the borrower’s mortgage interest rate as well as the size and term remaining on their mortgage.
He said the latest hike would “add significantly to the financial stress which so many homeowners are now under”.
“Tracker mortgage rates today therefore dwarf those that were in place before ECB rates start to rise,” he said.
He pointed out that while tracker mortgage holders have “taken the brunt of the increases” others are “increasingly being drawn into the firing line. Over 60,000 homeowners will come off their low-cost fixed rates this year, while another 70,000 will do so next year. The mortgage bills of these 130,000 homeowners will shoot up unless they act now to shield themselves from the mortgage shock just around the corner.”
He said that while the fixed interest rates available today “are much higher than they were a year ago but holding off for a better fixed rate deal now seems increasingly futile”.
