LAST UPDATE | 16 Mar 2023

THE EUROPEAN CENTRAL Bank has decided to increase interest rates by 0.5 percentage points. 

It means the base interest rate in the Eurozone and Ireland will rise to 3.5% – the sixth increase since last summer.

In a statement, the ECB said the decision was taken as inflation is “projected to remain too high for too long”, adding that it is “monitoring current market tensions closely”.

The increase in the ECB’s base interest rate will likely have a knock-on effect for some mortgage holders.

Shortly after the decision, Bank of Ireland confirmed that its tracker mortgage rates will increase for customers from 5 April. 

Online broker Joey Sheahan of MyMortgages.ie said that today’s change would add another €50-a-month to the mortgage bills of a homeowner on a 30-year tracker mortgage of €200,000.

“The ECB rate now stands at 3.5% – up from the zero rate that it stood at before interest rates started to rise. At this rate, the mortgage repayments on a 30-year tracker mortgage of €200,000 are costing the borrower €350 a month more or €4,200 a year more than they did before July 2022,” Sheahan said today. 

Criticism of today’s decision has been widely voiced from members in the banking sector due to uncertainty around recent collapses of Signature and Silicon Valley Bank, the largest bank collapse since 2008.

Following its meeting today in Frankfurt, the ECB said it stands “ready to respond as necessary” to preserve price stability and financial stability in the euro area. 

“The euro area banking sector is resilient, with strong capital and liquidity positions. In any case ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy,” the ECB said. 

Because of the recent banking collapses, there had been speculation over whether the ECB will follow through with the decision at all with investors “rattled by worries”, according to head of money and markets at Hargreaves Lansdown, Susannah Streeter.

Dan O’Brien, chief economist for the Institute of International and European Affairs (IIEA), also told Morning Ireland, “There is severe turbulence happening in banking and financial markets… that could make the [European] Central Bank pause.”

O’Brien added, “It’s possible, rather than increasing by half a percentage point, it will increase by a quarter.”

Customers in Ireland saw mortgage rates rise after a similar increase in February from the ECB, as AIB hiked all mortgage rates by 0.5%.

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O’Brien said that Ireland is “in the very middle” of the international banking sector and that the country could be “really badly affected” in the event of an international financial crash.

However, he added that the ECB has to be careful to balance its decision as increased interest rates can risk a financial crisis while a lack of action could further impact inflation rates around the country.

ECB President, Christine Lagarde, had said the bank’s 26-member governing council will “very, very likely” raise interest rates.

It would be the sixth successive increase for the 20-nation currency club, leaving the ECB’s three main rates 3.5 percentage points higher since July.

Additional Reporting by Eoghan Dalton and AFP