A top economist has advised mortgage holders to give "serious consideration" to fixed rate mortgages as interest rates could rise by as much as three percentage points from the current levels, an economist said today.
Mr Eoin Fahy, chief economist at KBC Asset Management in Dublin predicted euro zone interest rates wil geadually revert to their long-term level of around 5 per cent as the recent economic recovery in the area's major ecomnomies gathers steam.
Mr Fahy said the ECB may even be forced into an early monetary tightening to prevent inflation from rising oil prices choking the fragile recovery.
Inflation has risen from around 1.5 per cent a couple of months ago to well over the ECB's 2 per cent target mostly due to a rise in oil prices which show little sign of falling.
As the euro zone economy reverts back to its long term growth rate estimated by economists to be around 2.2 per cent and with an inflation target of 2 per cent, economists estimate the "neutral" interest rate is somewhere between 3.5 and 4 per cent.
"All this means that, at least according to economic theory, European interest rates are now about 2 per cent below their average, normal, or neutral level.
And it seems fairly clear that at some point over the next year or two, we will get back to that level," Mr Fahy said.
Mr Fahy forecasts that as the economy stregthens further it is likely that the level of interest rates will also rise, possibly by another percentage point.
If this optimistic scenario of the euro zone's recovery proves correct, Mr Fahy thinks euro zone interest rates are likely to rise by up to three percent over the next two to three years, taking the main ECB rate to 5 per cent and mortgage rates to above 6 per cent.
However it should also be noted that core European interest rates have exceeded 5 per cent only once in the last twenty years, when the exceptional circumstances surrounding German re-unification sent inflation and interest rates soaring.