Interest rate rises mean a typical mortgage borrower will be paying €180 more in monthly repayments by next December, writes Marc Coleman, Economics Editor
A cool €1.8 billion. According to Irish Intercontinental Bank (IIB) chief economist Austin Hughes, that's exactly how much money will have been taken out of the Irish economy by the end of this year by the European Central Bank (ECB). Keep that number in your head for the moment, because it is an interesting one.
A borrower with a typical mortgage of say €250,000 and a 20-year term, loses around €30 in monthly income every time the ECB implements one if its now standardised quarter per cent interest rises. Since last December, the average borrower is down €150 a month.
Yesterday's quarter-point interest rate rise, the fifth since it began its present "cycle" of interest rate tightening last December, will be followed by another in December - that is at least if you believe most economists. So by next December that figure will have risen to about €180 a month.
According to some, most of the pain will stop there. But here is where economists start disagreeing. Yesterday's rise left the ECB's base "main refinancing rate" at 3.25 per cent and it will start next year at 3.5 per cent.
If you believe Austin Hughes, that will be the end of the matter and rates will stay put. But in this paper yesterday Jim O'Leary argued that a further four rises could be in prospect.
Hughes has Trichet's most recent comments on his side; O'Leary has ECB history. Hughes has pointed to a remark by Trichet on Thursday in which he referred to the need for "further withdrawal of monetary accommodation", which translates from central bank speak as a need to raise rates. Hughes pointed out that in previous such assessments, Trichet had used the words "progressive withdrawal".
The difference? According to Hughes, the word "progressive" implies that a sequence of increases is in store, whereas the word "further" implies just a little further tweaking.
But the ECB's monetary history might sit at odds with this translation. In its first and only previous phase of tightening, between April 1999 and October 2000, the ECB increased its refinancing rate from 2.5 to 4.75 per cent, a jump of 2.25 per cent. In this tightening phase, and starting from a lower base of 2 per cent, Hughes is suggesting that the ECB will increase rates by just 1.5 per cent and leave them a full percentage point lower than it did at the end of the last tightening phase.
To your average punter, there's €150 a month hanging on the balance of this argument, and a lot more for many of our younger borrowers.
But turning to the macroeconomic side of the story, at least €1.8 billion will be taken out of the economy by the end of the year. That is exactly the amount by which total tax revenue exceeded expectations in the first nine months of the year. By year end, that tax buoyancy will increase further over the €2 billion mark.
Like the correct reaction to the surge of Exchequer revenues - a once-off windfall gain rather than a permanent increase in income - the correct response is to do nothing. Rate rises are a deliberate instrument of government (in this case the ECB, for it is our monetary government) aimed at curbing inflation. With an election in the offing, though, the chances are that a good chunk of those Exchequer revenues will be recycled into tax cuts aimed at our younger borrowing classes.