The turmoil in world financial markets could save homeowners from interest rate rises later this year and ease pressure on high rates of inflation, economists said yesterday.
Higher mortgage interest costs have pushed the annual rate of inflation up to 5 per cent, according to figures released yesterday. Another interest rate rise is widely expected in September, which would add to inflation.
But a shortage of cash in the European banking system yesterday - triggered by worries over the US mortgage market - drove up short-term interest rates in Europe.
The tight market conditions remove justification from the European Central Bank (ECB) for increasing interest rates, NCB economist Eunan King said.
"The ECB and the Bank of England may have to find a way to back-track on their signalled rate hikes, unless the current turmoil in financial markets calms," Mr King said.
But Ulster Bank economist Pat McArdle said the situation would have to get worse before interest rate rises would be postponed.
"I think it would have to get worse before the ECB would change its mind, but any more of this and [the rate increase in] September would look doubtful," he said.
Yesterday, the ECB took emergency measures, injecting a record €95 billion into the banking system to stop it from freezing up as investors sold risky assets.
The only other time the ECB has taken such dramatic action was on September 11th, 2001, when it lent €69 billion to the banks, soon followed by €40 billion.
Yesterday's storm was the result of difficulties in the US subprime mortgage sector, where large numbers of high-risk borrowers have defaulted on loans.
Mortgage holders have faced eight increases in interest rates since December 2005, with the result that, even after additional tax relief introduced in the last budget, repayments on a typical €250,000 mortgage over 30 years are now €230 higher a month.
Before yesterday, one or two more rate hikes were expected by the end of the year.
Consumers are paying 44 per cent more in mortgage interest than they were this time last year, according to data released by the Central Statistics Office yesterday. These payments and rising energy prices are the main drivers of inflation, which has dipped below 5 per cent only twice this year.
The July increase in inflation surprised many economists, who blamed retailers for giving smaller than usual discounts in the summer sales. The price of clothing and footwear fell just 8.4 per cent last month, compared with an 11.6 per cent drop in July 2006.
Despite fears that weather-related damage to crops across Europe would push up food prices, these increased just 0.1 per cent last month. But the cost of food is now increasing at an annual rate of 2.6 per cent, which is a 14-month high.
The prices of bread, milk, potatoes, fresh vegetables, tea and coffee have also increased more sharply, while concerns about foot-and-mouth disease could put extra pressure on food prices.
Bloxham economist Alan McQuaid said food prices were "the big unknown" for inflation rates, but that the omens did not look good. High inflation is a more pressing economic issue for the Government than the slowdown in the housing sector, he said, as it is making life increasingly difficult for exporters.
Fine Gael finance spokesman Richard Bruton called the Government's handling of inflation "pathetic" and demanded stronger pro-consumer policies to protect families.
