ECB confirms rate hikes from July
The European Central Bank confirmed what it had been strongly implying for quite some time.
The bank will start raising interest rates for the first time in more than a decade next month.
So what does all of this mean for consumers and mortgage holders across the bloc?
The ECB has been criticized for what many believe has been its slowness to react to the inflationary environment.
Prices in the Eurozone have risen at an annual rate of more than 8% according to the latest figures.
That’s more than four times the 2% target rate at which central banks like to keep inflation going.
The bank had stuck to the argument that inflation was transitory and had more to do with supply chain issues resulting from the pandemic and the reopening of economies.
This argument was more or less abandoned after the Russian invasion of Ukraine.
But the debate then shifted to what level of interest rate hike would be appropriate in the context of an economy that could risk contracting with a war raging on its doorstep.
He is given some indications on how he intends to proceed now.
The bank will get off to a smooth start by raising its rates by 0.25% at its meeting in mid-July.
We more or less knew this was coming and a further rate hike in September was expected.
However, this has changed the settings somewhat for what’s to come in September.
He said if the inflation outlook persists or deteriorates, “a bigger increase will be appropriate at the September meeting.”
It was a bit of a surprise.
Moreover, he anticipates that a “gradual but sustained path of further interest rate increases will be appropriate” beyond that.
Will my mortgage interest rate go up in July?
The bank is likely to focus on the deposit rate first, which is at -0.5%.
This will almost certainly be down to zero by September.
This is the rate financial institutions get for depositing excess money with the ECB (despite being charged for it in the era of negative rates).
The rate that affects our borrowings is currently zero.
Now it comes down to when they choose to start increasing that rate.
In light of further guidance from the bank at the September meeting, it could start pushing that rate higher from there, or it could even raise it in July along with the deposit rate.
As soon as this rate increases, the cost of variable and tracker mortgages will increase.
What difference would it make to my tracker?
Joey Sheahan, Credit Manager at MyMortgages.ie and author of the Mortgage Coach, crunched some numbers on this.
A borrower who has €300,000 outstanding on a 1% tracker rate, with 20 years remaining, would currently have a monthly repayment of €1,379.
“A 0.5% rise in interest rates would bring that to €1,447 – an annual increase of €816, or €16,320 over 20 years,” he explained.
“A 1% rise in the ECB benchmark rate would bring monthly repayments to €1,517, an annual increase of €1,656 or €33,120 over 20 years,” he added.
Trackers are no longer issued, so someone who took out a floating rate mortgage more recently would be variable rate.
Mr. Sheahan used the example of a similarly sized mortgage at a variable rate of 4.25% with 30 years left to term.
Such a mortgagee would have monthly repayments of €1,475.
“A 0.5% increase in interest rates would bring that to €1,564, an annual increase of €1,068 or €32,040 over 30 years,” he said.
“A 1% rise in the ECB benchmark rate would bring monthly repayments to €1,656, an annual increase of €2,172 or €65,160 over 30 years.”
What about fixed rates?
Some fixed rates have started to rise in recent months as the cost of ‘longer term’ money has started to rise.
This process is likely to accelerate now, with the ECB confirming the end of its bond buying programs and signaling higher interest rates.
But there is still very good value to be found in fixed rate mortgages and there has been an increase in switching activity of late.
“We are seeing a steady increase in the number of movers/second home buyers seeking mortgage approvals with flexible long-term fixed rate options. This follows the trend set by existing mortgage holders looking to protect themselves against impending future increases. interest rates,” said Trevor Grant, president of the Association of Irish Mortgage Advisors (AIMA).
Rachel McGovern, director of financial services at Brokers Ireland, said substantial savings were to be made by switching providers and fixing prices.
“Over the past 10 years, we have gone from an average fixed rate of 4.85% to today where the average fixed rate is 2.59% on new fixed rate agreements,” he said. she pointed out.
She also suggested looking at the option of fixing for longer periods with fixed rates up to 30 years now available.
“Long-term fixed interest rates, which are relatively new in Ireland, have brought the best value to the Irish market in recent years,” she said.
How high are rates likely to go?
Central Bank statements still contain a lot of wiggle room.
And they should because the situation can change very quickly and they need to be able to change course to deal with new scenarios.
But now it looks like we’re well on our way to an era of more expensive silver.
The main borrowing rate in the UK has already been raised to 1% by the Bank of England and the US Federal Reserve has moved rates to a similar stage.
And they probably haven’t finished yet.
It would not be unreasonable to suggest that we are on a similar path here.
Austin Hughes, chief economist at KBC Bank Ireland, referring to today’s inflation figures from the CSO, said the pace of price increases showed no signs of slowing.
“With fuel prices rising further in early June and the impact of rising transport costs and global supply issues not yet fully visible, it is likely that Irish inflation will not yet have peaked,” he explained.
“It seems likely that headline inflation could push to near 9% and could even threaten 10% depending on the vagaries of global energy markets,” he added.
He added that any pullback would likely be modest and could be slow to materialize, especially in light of contagion effects in areas such as increases in mortgage rates.
On the other hand, some point out that the bank may be too hasty in signaling rate hikes at a time of such uncertainty in the overall economic outlook.
“The possibility of a bigger increase from September increases the risk of an ECB policy error,” said Bill Papadakis, macro strategist at Swiss bank Lombard Odier.
“Conditions in the Eurozone are different. GDP is still below pre-pandemic levels, wage growth is much more subdued, and growth is threatened by the war in Ukraine. Basically, the war is fueling the upside energy prices, which in turn are causing high inflation in Europe More expensive energy is eating away at consumers’ real incomes, undermining growth, which is likely to suffer if the ECB goes further ahead with an aggressively tighter monetary policy.
If that were to happen, the ECB might be forced to reassess how aggressively it is raising medium-term interest rates.
In the short term, the rates only go in one direction, that is to say upwards.
Until what point? Nobody really knows.