So the ECB has increased its interest rates again, has it?
It has indeed. In a move that was very widely anticipated, the European Central Bank upped its key deposit rate by a quarter of a percentage point to 2.25 per cent and its main lending rate to which ECB tracker mortgages costs are linked by the same margin, which will take it to 2.4 per cent. It is the first increase in close to three years.
And what does this rate increase mean for me?
Well that depends. If you don’t have a mortgage or are a homeowner with a fixed-rate loan that has quite a while left to run, it will mean absolutely nothing. If you are on a standard variable rate, you might be nervously watching what your lender does in the weeks ahead. But if you have a tracker mortgage – and around 120,000 people still have those legacies from Celtic Tiger era – then you are going to feel the impact within weeks.
And what will that impact be?
A 0.25 percentage point increase in lending rates will add around €14 to the monthly repayments on an €100,000 loan. If a person still has €200,000 outstanding on their mortgage, they will have to pay close to €30 more each month starting with the July repayment.
That is bad news for tracker holders, isn’t it?
It is not great for sure but it is worth noting that for well over a decade that cohort were paying incredibly low rates of interest compared to variable and fixed-rate mortgage holders. And while they have felt significant pain in recent years with rate hikes after Russia invaded Ukraine costing many over €3,000 a year, multiple rate cuts since 2023 have eased the financial pain.
RM Block
[ The Irish Times view on interest rates: ECB should tread carefullyOpens in new window ]
Why has the ECB decided to hike its rates now?
It is all about inflation. As Daragh Cassidy of price comparison and switching website bonkers.ie noted, the rate of inflation across the EU is hovering around 3.2 per cent, well above the ECB’s 2 per cent target. “That’s even before the full effects of the current energy supply shock have filtered through to the economy,” he said
So there could be a second rate increase later this year?
There absolutely could be – or even a third one – although the head of the ECB, Christine Lagarde, refused to rule anything in or out when she was talking about the rate increase. She said that, in the months ahead, the interest rate decisions of the bank’s governing board “will be based on our assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path”.
So is that a yes or no to a further increase then?
It is a definite maybe. Davy investment strategist Stephen Grissing said the ECB move “marks a clear signalling of its intent to stay ahead of inflation risks while maintaining a measured policy stance”. He pointed out that it had previously been criticised for “reacting too slowly in 2022, increasing rates after inflation had already climbed above 8 per cent year-on-year, in comparison to the 3.2 per cent level it sits at today. He suggested there would be one more similar increase before the end of the year “with any future increases likely to be gradual and carefully calibrated, balancing the more contained nature of current inflation pressures and the ECB’s desire to avoid unnecessarily weighing on economic growth”. The general view in the market is that a second increase in September is the most likely next step.
And is there anything I can do to protect myself from the rate hikes?
There probably is and it is not just tracker holders who should be considering their next steps. Rachel McGovern, of Brokers Ireland, points out that when interest rate cycles change, they have the potential to deliver changes beyond merely the interest rates; the nature of mortgage products themselves can change. “When the market changed from historically low rates in mid-2022 onwards, some of the better long-term fixed interest rate products were withdrawn from the market,” she said.
She added that the “window to act in terms of getting the best rates is closing so we would be advising all mortgage holders who have not reviewed their position to do so now without delay”.
But this rate increase might be good news for savers right?
Well you would imagine that if the ECB is increasing its interest rates, those increases will just as quickly be passed on to Irish savers who have in excess of €170 billion on deposit in right now. But evidence from times past suggests that might not be the case. “Irish banks have historically been slow to pass on ECB rate increases to savers,” warned Nick Charalamous of Alpha Wealth.
