LAST UPDATE | 11 Jun

THE EUROPEAN CENTRAL Bank (ECB) has hiked interest rates for the first time since 2023.

The ECB will raise its key deposit rate to 2.25% from 17 June from 2% as the Iran war fuels inflation.

It’s bad news for over 100,000 tracker mortgage holders, who will feel the increase first. The rate off which tracker mortgages are priced has gone up to 2.40%.

“Anyone on a tracker mortgage will feel the impact almost immediately,” said Daragh Cassidy of price comparison website Bonkers.ie.

Someone with €150,000 left on their tracker over 10-15 years will see repayments go up by over €200 per year, Cassidy said.

The good news for consumers is that increases in interest rates should see savings and deposit rates rise.

However, variable rate mortgage customers also stand to be negatively affected, while those coming to the end of a low fixed rate could face higher repayments when their current term expires.

Martina Hennessy of broker Doddl said a 0.25 point increase could mean €50 extra each month for someone with an average mortgage of just over €360,000 and a 30-year term.

“If rates rise three times, as predicted by some analysts, that’s €1,800,” Hennessy said.

Analysts expect another increase, possibly in September, but today’s move is not currently expected to herald the start of an aggressive rate-hiking cycle.

Irish stockbroker Davy said this afternoon that it expects perhaps one more 0.25 percentage point increase before the end of the year. 

This afternoon, the ECB also raised its inflation forecasts while cutting growth expectations for this year.

The bank now forecasts inflation of 3% under its baseline scenario, up from its March figure of 2.6%. Baseline GDP growth is now seen at 0.8% for the year, down from a March forecast of 0.9%.

ECB president Christine Lagarde defended the decision to raise interest rates despite worries that it could hit the eurozone economy.

“It’s not as if we are in an environment where growth is absent or under significant threat,” Lagarde told a press conference this afternoon.

‘The mortgage market remains competitive’

Irish lenders may increase fixed rates for new customers in the coming weeks, particularly if the ECB raises rates again at its next meeting in July.

Anyone on a variable rate mortgage or due to come off a fixed rate in the coming months would do well to assess their options, said Cassidy.

Thousands of mortgage holders who took out fixed rates as low as less than 2% three or four years ago are coming to the end of these terms now and can expect a significant increase on their repayments when they come to re-fix, Cassidy warned.

That’s especially the case if consumers don’t compare all the options on the market.

Hennessy, of Doddl, said the biggest risk faced by borrowers isn’t today’s rate rise in itself, it’s assuming they have no options.

“The market currently remains competitive, with rates starting from 3% and products rewarding those with lower loan to value [ratios],” Hennessy said.

That means homeowners who have seen the value of their home increase could get a more competitive rate if they shop around.

Cassidy noted that some smaller non-bank mortgage providers have already increased their rates in recent weeks. These lenders are more heavily dependent on financial markets to fund their mortgage lending so are more sensitive to changes in wholesale funding costs.

The main banks — AIB, Bank of Ireland and PTSB — are less exposed because they fund more lending through customer deposits. However, rate increases from these lenders later this year, can’t be ruled out, Cassidy said.

Struggling eurozone

Today’s change makes the ECB the first of the world’s major central banks to lift borrowing costs in response to the energy shock unleashed by the US and Israel’s war against Iran.

Eurozone inflation has been accelerating, hitting 3.2% in May, above the ECB’s two-percent target. Higher borrowing costs dampen demand, helping to bring down inflation.

While some smaller central banks have lifted rates in response to the energy shock, the US Federal Reserve and Bank of England have held off as they assess the fallout. However, both are due to hold meetings next week.

A growing number of economists have spoken out against lifting rates.

They warn the move may do little to tackle inflation that has stemmed mainly from a shortage of energy supplies rather than strong consumer demand.

Higher borrowing costs would also weigh on the eurozone economy, which contracted in the first quarter.

Holger Schmieding, an economist at Berenberg Bank, a German merchant bank, argued that a hike would be a mistake when consumer confidence and business activity surveys are already showing declines.

“The last thing the eurozone needs is a further headwind in the form of higher interest rates to exacerbate the Iran war damage,” he said.

Despite concerns about a rate hike, ECB officials may be nervous about waiting too long, especially after facing criticism for moving too slowly to tame the inflation surge in 2022 when Russia’s invasion of Ukraine caused runaway inflation.

Most analysts believe the economic backdrop now is different, as inflation was already elevated before the outbreak of the Ukraine war, and the global economy was struggling with post-pandemic supply chain woes.

With reporting from Emma Hickey, Cara McHugh and © AFP 2026