LAST UPDATE | 14 Sep 2023

THE EUROPEAN CENTRAL Bank has risen interest rates by 0.25%, in the tenth consecutive increase.

For most of those with tracker mortgages, this increase will push up their mortgage repayments by €25 per month or more.

The rate setters faced the toughest call of their long battle with inflation today, but they decided not to pause the unprecedented hiking campaign.

Prices have risen quickly, but the outlook in the single currency area is also deteriorating rapidly.

The central bank for the 20 countries that use the euro had already lifted rates by 4.25 percentage points since July last year to combat runaway consumer prices.

Ronan Brennan, Head of Retail Banking Service Delivery with Delta Capita, said those with tracker mortgages “will be hit immediately”, but those on variable mortgages will feel the effects too.

“The borrowers moving from fixed rate to variable rate mortgages as their fixed mortgage contracts expire are also facing higher interest rates, and in turn a rise in monthly mortgage bills and for some, a greater risk of mortgage arrears,” he explained.

“For the banks, the impact of ongoing and sustained loan interest rate rises is likely to increase the level of missed payments in their performing loan book. It is also likely to really challenge those customers already struggling with existing arrears or who have previously been in arrears.

“Customers who have fallen behind on their mortgage repayments in the past could therefore now fall back into arrears despite having managed to resume making repayments in recent years and so banks could see a reverse in the progress made on some reperforming loans – that is, loans that had previously been cured – in the coming months.”

Further increases this year are “unlikely”, according to Joey Sheahan, Head of Credit at online brokers MyMortgages.ie, who said the continuous hikes over the last 14 months have “wreaked havoc” on mortgage holders.

“Higher interest rates have restricted how much house hunters can borrow as the amount of demonstrated repayment capacity banks want to see has increased by as much as €600 monthly for a €300,000 mortgage meaning banks want to see mortgage applicants save a whole lot more each month.”

Analysts were divided on whether the ECB would implement another 25-basis-point increase or take a break.

Recent data showed eurozone second-quarter growth reached just 0.1%, lower than previously estimated, and the EU on Monday slashed its 2023 and 2024 GDP forecasts for the single currency area – pointing in particular to weakness in Germany.

Europe’s top economy is struggling to get back on its feet after sliding into recession around the turn of the year, hit by an industrial slowdown, high energy costs, and slowing exports to key partners such as China.

The ECB sees inflation reaching 5.6% in 2023, 3.2%t in 2024 before easing to 2.1% in 2025.

In its previous forecasts in June, the ECB had predicted inflation would reach 5.4% this year and 3.0 percent in 2024, while 2.2 percent was expected in 2025.

Andrew Webb, Chief Economist at Grant Thornton Ireland, said the interest rate increase “makes sense”, but this move may be “a step too far”.

“The next few months will be telling,” he said.

Ian Lawlor, Managing Director, Lotus Investment Group, said today’s hikes will have “limited” impact on Ireland’s property market, “as we still don’t have enough homes for the people who want to buy them”.

“While rate rises might reduce the amount that some house hunters can borrow, there are still five to six buyers for every new property coming on stream.

“When it comes to Ireland’s residential property market, rates are simply not the big issue… the core problem is planning, and lengthy delays within our system that are leading to a severe dearth of shovel-ready sites.” 

© AFP 2023