THE EUROPEAN CENTRAL Bank is expected to increase interest rates later on Thursday, as it tries to keep the surge in energy prices from the Iran war from snowballing into widespread inflation.

The bank wants to push down inflation without denting economic growth, but a hike will mean higher borrowing costs and see mortgage rates rise for anyone negotiating a new loan or refinancing existing ones.

Last June, the ECB raised its key deposit rate to 2.25% from 2% as the Iran war fuelled inflation.

Most analysts say a quarter-point hike to the ECB’s deposit rate to 2.5% is a near certainty.

Martina Hennessy, chief executive of broker Doddl, said that Ireland’s more than 100,000 tracker mortgage holders are most exposed if there is an increase.

Someone with €150,000 left on their tracker over 10–15 years will see their repayments jump by about €216 per year, according to Hennessy.

However, as Thursday’s ECB decision could mean the second rates increase for this year, it would mean that mortgage holder will now face repayments of more than €430 extra per annum.

Variable rate customers may also be impacted by an ECB increase.

However, consumers may benefit from an increase on their savings and deposit rates.

Hennessy said that with mortgages being a homeowner’s single biggest monthly financial commitment, a rate increase can have a big impact, with a very significant spread between the highest and lowest mortgage rates available.

“Taking the latest new mortgage draw down level of €358,000 and looking at the difference between the highest and lowest rate on the market, savings of up to €640 per month or €7,600 per annum are possible,” the broker said.

“For a household already dealing with higher energy, food and childcare costs, that is significant.”

Spending power curtailed

Economists have warned that people are going to see mortgage rates rise if they are negotiating a new loan or refinancing existing ones, meaning they will lose some of their spending power.

“People are going to see mortgage rates rise if they are negotiating a new loan or refinancing existing ones, so they lose some of their spending power,” said Frederik Ducrozet, head of strategy and macro research at Pictet Wealth Management.

This risks weighing on growth, but the ECB may feel it has little choice because the surge in fuel costs “is a real problem”, Ducrozet told AFP.

“The ECB is afraid of knock-on effects, with inflation taking root across Europe on the domestic front, for example via salary negotiations,” Ducrozet said.

But raising rates preventively “carries growing risks for the eurozone economy,” said Christophe Boucher, investment director at ABN AMRO Investment Solutions.

“If you expect rates to raise even more, and if the yields on the long-term debt of France and other European countries continue to climb, it tightens monetary conditions even more than central bank hikes alone,” Ducrozet said.

By raising the interest dates, it’s likely to put a damper on spending plans for both households and businesses who are faced with higher mortgage costs.