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Headquarters of the European Central Bank in Frankfurt, Germany. DPA/PA Images

AIB due to raise mortgage rates following European Central Bank hike

The bank said that it intended to raise interest rates further in March.

LAST UPDATE | 2 Feb 2023

AIB IS SET to hike interest rates on all mortgage types by 0.5% following announcements by the European Central Bank earlier today.

In a statement this afternoon, the bank announced that it would be increasing the interest rate by for both fixed and variable rate mortgages, alongside mortgages for its affiliate Haven.

The average rate of increase is 0.5%.

Customers with variable mortgage rates will see an increase of 0.35%, with the bank due to write to all impacted customers with new repayment amounts by 14 March.

Tracker mortgage customers will see their rates increase by 0.5%, in line with the European Central Bank rate hike.

The announcement was made by the ECB earlier this morning, less than two months on from a previous hike in mid-December.

The bank says that it intends to raise interests further in March and will continue to examine the policy in the months ahead.

“The Governing Council will stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target,” a statement from the ECB said.

According to the ECB, raising interest rates will help reduce inflation by “dampening demand”.

Following the increase, tracker mortgage customers will now face an increase to their monthly repayments.

With markets looking for clues about what might happen after March, ECB president Christine Lagarde told a press conference that the Frankfurt-based institution still has “ground to cover” in raising rates.

“We know that we are not done,” she said, adding that the ECB’s determination to return inflation to its 2% target “should not be doubted”.

Bank of Ireland has confirmed that tracker mortgage repayments will increase by 0.5%, in line with the ECB hike.

This increase is due to come into effect from 22 February, with the bank due to write to all mortgage customers in the coming days to confirm their new repayment amount

“The Bank continues to keep all rates under ongoing review and will clearly communicate any future rate change decisions at the appropriate time,” said a spokesperson for Bank of Ireland.

Policy change

The bank launched this unprecedented campaign of monetary policy tightening after Moscow’s invasion of Ukraine, and subsequent cuts to gas supplies, sent eurozone energy and food costs spiralling.

Since July, it has lifted interest rates by 2.5 percentage points to tame consumer price growth – which peaked in October at over five times the bank’s two-percent target.

The bank’s governing council is expected to deliver a half percentage point hike today, the same as at their last meeting in December.

But, with inflation starting to slow, this is down from two 0.75 percentage point lifts before that.

The Frankfurt-based institution’s president Christine Lagarde “should reiterate that inflation… remains too high and reaffirm the absolute necessity for the ECB to continue to act over time to bring it down,” said Franck Dixmier at Allianz.

The Federal Reserve also lifted rates again yesterday, but downshifted to a smaller 0.25 percentage point increase as inflation cools in the United States.

Meanwhile, the Bank of England is also expected to increase borrowing costs again today.

In the eurozone, recent data have raised hopes the worst of the economic shock may have passed.

Eurozone inflation fell by more than expected to 8.5 percent in January, while the 20-nation currency club eked out growth at the end of 2022, defying fears of a contraction.

The less gloomy figures have given cause for hope that Russia’s efforts to strangle crucial gas supplies to Europe may not trigger the economic shock once feared.

As Moscow slashed deliveries following its invasion of Ukraine, European governments rolled out relief measures to cushion consumers and businesses from surging prices, and rushed to fill up storage facilities.

‘More positive’ signs

Wholesale gas prices have been easing while relatively mild winter weather has meant supplies have not been used up as quickly as expected.

Analysts hope that other factors, such as easing supply chain problems and the reopening of China’s Covid-hit economy, are now offsetting the fallout from Ukraine.

After months of doom and gloom, officials are striking a more positive note about the outlook.

Speaking at the World Economic Forum in Davos last month, Lagarde said the eurozone economy will fare “a lot better” than initially feared, with the news “much more positive in the last few weeks”.

Signs of weakness are still causing concerns, however.

GDP in Germany, Europe’s top economy, unexpectedly contracted at the end of 2022, signalling it may be about to tip into recession.

But it is expected to be a shallow contraction, and the government has forecast the economy will expand slightly over 2023 as a whole.

While the ECB has stressed it will “stay the course” to bring inflation back to target, policymakers are walking a fine line – seeking to tighten enough but not so much that it dramatically deepens economic pain across Europe.

Most analysts also expect a further 0.50 percentage point hike in March but, with inflation starting to ease, there are already signs of a debate among policymakers about when to slow the pace.

ECB board member Fabio Panetta, known for his dovish stance, said the bank should not commit to any particular hike beyond the forthcoming meeting.

Others, such as Joachim Nagel, the head of Germany’s Bundesbank central bank, have backed further hikes going forward.

All eyes will be on Lagarde’s comments after the rate decision is announced for hints of a future direction.

© AFP 2023 

Additional reporting by Tadgh McNally

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