In a bid to tackle high inflation, the European Central Bank has hiked rates to 4%, bringing borrowing costs to their highest level since the 2008 financial crisis.
As expected the European Central Bank (ECB) has hiked interest rates again.
This is the EIGHTH increase since last July.
Its main lending rate, off which trackers and mortgages are priced, is now 4%, up from 3.75% previously. Its deposit rate was raised to 3.50%.
The ECB, like all major central banks, has been hiking rates aggressively over the past year in an effort to bring down inflation which is still running way above its target level of close to 2%.
In May inflation in Ireland was running at 6.6% while the average rate in the Eurozone was 6.1%.
How will this news affect me?
If you’re a tracker customer, you’ll see an almost immediate hike in your mortgage rate of 0.25 percentage points. If you’re paying a margin of 1% - it means your mortgage rate will now be 5% for example. In money terms, if you have €100,000 remaining on your tracker your repayments will go up by around another €12 or €13 a month. If you have €200,000 outstanding it’ll be around €25.
If you’re on a variable rate, it’s likely your repayments will also go up soon. The main banks in Ireland have been slow at passing on the recent ECB rate hikes to their variable-rate customers - partly because these rates were so high to begin with. Indeed, Permanent TSB and Bank of Ireland haven’t hiked their variable rates at all. But this is unlikely to last now that rates are at 4%. You could see a 0.25 percentage point increase to your mortgage rate or slightly more over the coming weeks. Again, if you have €200,000 outstanding on your mortgage you’ll be looking at paying around €25 more a month.
If you’re on a fixed rate and are due to come to the end of your fixed rate within the next two years, you need to start budgeting for higher repayments. This is because the rate you’re paying now is likely to be a lot lower than the rate you’ll get when you come to re-fix. For example anyone who took out a fixed rate over the past three or four years will likely be paying a rate of between 2% and 3.5%. However most fixed rates are now between 3.5% and 5% - and are likely to go higher after today’s announcement.
Rates on loans, overdrafts and credit cards may also creep up over the coming months.
Property prices
Rising mortgage rates are also likely to impact on property price growth. Indeed prices in Dublin have now been falling for several months, which we discuss here.
Controversial
The ECB is trying to rein in record inflation, which if left unchecked, could wreak havoc with the economy.
However, like all central banks, it’s in a bit of a bind. High energy prices, due largely to the war in Ukraine, and lingering supply chain bottlenecks due to Covid, are behind a lot of the recent surge in inflation. However these problems won’t be solved by raising interest rates.
Indeed many argue that record energy prices, which have added thousands of euro to people’s heating, lighting, and transport costs throughout Europe, are already acting as a drag on growth and cooling the economy anyway, and that an increase in rates is just adding further misery to consumers’ finances when they can least afford it.
There have also been suggestions that some companies are taking advantage of the recent surge in inflation by upping their prices even though they don’t need to and that tackling this issue would be a better way to bring down prices.
The ECB also faces a delicate balancing act in trying to tame inflation without causing too much damage to the economy. This was brought into sharp focus earlier in June when it was confirmed the eurozone had entered a technical recession in the first quarter of the year.
Have other central banks increased rates?
Yes. By a wide margin.
The US, UK, Canadian, Australian and New Zealand central banks have all raised rates significantly over the past year. So the ECB isn’t alone here.
Rates in the US and New Zealand are over 5%.
The future
The ECB will next meet at the very end of July when it's likely to hike rates by another 0.25 percentage points to 4.25%. Or it may leave rates unchanged and hike in September instead. Either way, at least one more quarter point increase is highly likely.
So this means yet more mortgage rate hikes will be on the way.
At the moment it looks like the ECB may then pause its rate hiking cycle and leave rates unchanged for many months. And rates may begin to fall slightly in early 2025.
However a small bit of good news is that savings and deposit rates should also creep higher over the coming months. At the moment the best rate on offer from the main banks in Ireland is 2%, which is available from AIB.
This is likely to rise to around 2.5% or 3% by the end of the year. However you may get better rates by saving through platforms such as Raisin or Trade Republic.
You can compare all savings rates from all providers on bonkers.ie right now.
Get in touch
If you’re worried about rising mortgage rates, chat to us here at bonkers.ie.
If you’re on a tracker, a variable rate, or are soon to come to the end of your current fixed-rate period, chat to our mortgage broker team and we’ll help you to assess your options before rates go even higher.
