Mortgage holders face higher interest rates than previously forecast that could remain at elevated levels for longer, after a slew of top European Central Bank (ECB) policymakers vowed to bring inflation back down to its 2 per cent target rate.
Two members of the group that sets interest rates at the ECB warned on Friday the bank must keep fighting to slow price growth, with one warning it will be next year before any rate cut is possible. That reinforced comments from other officials earlier this week, including Central Bank of Ireland governor Gabriel Makhlouf, which suggest the bank’s stance on future rate hikes is hardening.
In comments published on Friday, ECB governing council member Isabel Schnabel warned the bank was still “far away” from being able to declare victory in the battle against inflation.
‘Good outcome’
“A broad disinflation process has not even started,” Ms Schnabel told Bloomberg News. “Assume inflation is going to come down very quickly toward 2 per cent and it is going to stay there, while the economy will do just fine. That would be a very good outcome, but there is a risk that inflation proves to be more persistent than is currently priced by financial markets.”
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Irish inflation fell to 7.8 per cent in the year to January, the Central Statistics Office said on Thursday, the third consecutive month it has declined as the ECB raises rates in an effort to suppress prices. Still, across the euro zone the inflation rate is estimated at 8.5 per cent last month, according to Eurostat.
Ms Schnabel’s comments helped push bets on the financial markets that the ECB may now cap its deposit rate at 3.75 per cent. That implies its main interest rate used for mortgages would peak at 4.25 per cent, up from 4 per cent previously. The main interest rate stands at 3 per cent.
Each increase of half a percentage point is estimated to add about €45 to the repayment on a €200,000 mortgage. Interest rates have increased by three points since last summer.
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Separately, Francois Villeroy de Galhou, another member of the governing council, said interest levels would likely reach their peak, or “terminal rate” by September at the latest. Importantly, Mr Villeroy de Galhou, who is also governor of the French central bank, effectively ruled out the prospect of a rate cut before 2024 at the earliest.
“The battle against inflation will only be won through perseverance, by keeping interest rates high for as long as necessary,” he said. “We must be wary of declaring victory too quickly.”
Ms Schnabel’s and Mr Villeroy de Galhou’s comments echo ECB president Christine Lagarde, who earlier this week reiterated the bank’s plan to use rates to cool the bloc’s economy if that means slowing price growth.
Higher rates
In a sign of the growing acceptance that higher rates are likely to be here for longer, Central Bank of Ireland governor Gabriel Makhlouf also said this week that rates may need to move higher and that policymakers risked losing their authority if they are seen as soft on inflation.
“If households, firms and financial markets no longer trust in the ability of the central bank to deliver its inflation target, we will see medium-term inflation expectations begin to drift above it,” he said in a speech on Thursday. Central bankers fear that if they do not get price growth under control, workers will demand ever higher wages, creating a vicious circle known as a wage-price spiral.
The ECB is set to increase rates by half a percentage point at its next meeting on March 16th. — Additional reporting by Bloomberg
