Analysis: The interest rate hike announced yesterday by the European Central Bank (ECB) shows that high oil prices are affecting the pockets of Irish consumers in more ways than one.
The ECB's main rationale for bumping up interest rates by a further quarter of a percentage point is to keep inflation in check.
The impact of last year's escalation in oil prices, alongside planned increases in indirect taxes, is a short-term inflationary pressure that the European economy could do without.
Inflation in the euro zone was running at 2.3 per cent in February, above the ECB's target of 2 per cent. It has revised its inflation forecast for 2006, expecting it to average at 2.2 per cent rather than the 2.1 per cent it envisaged in December.
The precise rates will "depend strongly on future energy price developments", ECB president Jean-Claude Trichet remarked.
According to Niall Dunne, financial markets strategist at Ulster Bank, the ECB's rhetoric indicates it has relaxed a little - it is no longer preaching "vigilance", but simply promising to "monitor developments closely".
Nevertheless, he believes the ECB is nervous that oil prices might spike again and nervous about the effect of Germany's sharp rise in its VAT rate in 2007.
Irish homeowners may well be getting nervous too. Not only will they have to hand over more cash at their local petrol station, but they will see their monthly direct debits to their mortgage lenders increase by around €15-€50 - more if they have loans in excess of €350,000, as many recent, urban buyers inevitably will.
A borrower repaying a €350,000 mortgage over 35 years on a typical variable tracker mortgage will have seen their monthly repayments rise by a total of €100 once the effects of the two rate increases is taken into account.
The ECB's governing council will meet to discuss interest rate policy a further eight times this year. If it were to follow the recent approach of the US Federal Reserve and make consecutive interest rate increases at each meeting, the prospect would be terrifying for Irish borrowers, according to IIB Bank chief economist Austin Hughes.
Thankfully, the ECB has been at pains to suggest that it won't do this.
"The clear message is that more hikes are coming, but they won't come thick and fast," says Hughes, who predicts that there will be two further quarter point increase in 2006, one in the early summer and one in the autumn.
While higher energy costs are pushing up inflation rates, moderate wage increases mean the ECB can take its time in raising rates, Mr Hughes commented.
So far no lender has jumped to increase their variable rates. The only financial institution to respond to yesterday's rate hike was Northern Rock, which pledged to pass on most of the increase to its deposit customers.
Borrowers who can ill afford substantial repayment increases would do well to look at fixed rates, advised Oliver Gilvarry, senior treasury dealer at Bank of Scotland (Ireland) Ireland. But fixed rates, too, seem set to climb.
