A landmark meeting of the European Central Bank later today will set the stage for the first in a series of interest rate hikes this summer, which will add a financial headache to as many as 740,000 Irish households already struggling with high inflation.

The ECB at a meeting in Frankfurt is expected to undo much of its huge support for bond purchases and pave the way for the first of two summer rate increases in July and September, which is likely to significantly add to the cost of Irish mortgage borrowers.

Until recently, financial markets were betting that the ECB meeting, which includes Governor of the Central Bank of Ireland Gabriel Mahlouf, was likely to authorize two successive increases in official rates by a quarter of a point each by September, to be passed on to many Irish families. their mortgage banks. .

However, according to traders, the turbulent prices for energy and food caused by the war in Ukraine may force the ECB to raise interest rates even faster.


Leading mortgage brokers said that any official increase in ECB interest rates is likely to mean that 460,000 mortgage borrowers out of 740,000 mortgage borrowers in the Republic will immediately face an increase in the cost of servicing their mortgages.

Nearly all 740,000 borrowers will pay more over time, as the remaining borrowers who take advantage of short-term fixed-rate mortgages return to new and higher borrowing costs.

Senior broker Michael Dowling said the two ECB rate increases in the summer, which had led to a 1.5-percent increase in mortgage rates, would add 80 euros a month or 960 euros for the whole year to the cost of households servicing the mortgage. The estimate is based on a mortgage loan of 300,000 euros.

It is worrying that any rate increase in the summer will be just the beginning and could lead to a 1.5-2.5% rate increase over the next 30 months, Mr Dowling said. “There is another increase. This is a real moment for borrowers,” he said.

Mortgage holders and mortgage holders have not experienced a rate hike for years, and “although the first rate hike may be absorbed by many households, any subsequent raise will be severely damaged,” the broker said.

Mr Dowling said a cumulative 1% increase in mortgage rates would add nearly 2,000 euros a year to a 300,000-euro home loan. Brokers have reiterated advice to borrowers to look for long-term fixed rates that exceed the typical three-year terms accepted by many borrowers.

Brendan Burgess, founder of the askaboutmoney website, said this is advice for people to fix in the long run because in the past economists and bankers have been very poor in their forecasts regarding interest rates.

Theoretically, because Irish mortgage rates are already among the highest in the eurozone, it is now more important than ever for households to consider what competitive lenders offer at long-term fixed rates of up to seven years, Mr Burgess said. .

He said there is, in particular, a large group of borrowers who enjoy expensive variable rates that can get significant savings.

Raise by half

Meanwhile, money markets raised rates on the ECB’s interest rate hike on Wednesday to 75 basis points, or an increase of three-quarters of a point, by September.

Given that the bank is expected to start growing in July and will move in increments of a quarter, prices suggest that traders now expect that its increase will include a rare half-point movement in one meeting until September, postponed from October , which was expected last week. .

Traders have steadily increased their rates on the ECB’s boost following higher-than-expected reports of eurozone inflation last week, which pushed the case to take bigger steps from the central bank. A number of ECB politicians have stated that they are ready to take a step back.

Until recently, financial markets bet that the ECB meeting, which includes the head of the Central Bank of Ireland Gabriel Mahlouf (pictured), most likely authorized two consecutive increases in official rates by a quarter of a point each until September, which will be passed to many Irish families. their mortgage banks.

“It seemed inevitable that 50-point increase rates would become more popular, given that the ECB is widely seen as lagging behind the curve, and other central banks have also begun to move in 50-point increments,” said Antoine Bouvet in ING. referring to the Reserve Bank of Australia.

The U.S. Federal Reserve and the Bank of England have already begun aggressively raising rates earlier this year to counter inflation. Earlier this week, Australia’s central bank raised interest rates by half a point with an unexpected surprise.

“Obviously, the April meeting was a mystery to markets where rhetoric did not meet market expectations, and I suspect the same may be true at this meeting,” the analyst said.

Bond yields

Yields on government bonds fell sharply after the April meeting of the ECB, when the ECB refrained from firm promises to withdraw incentives beyond what was outlined in March. Bond yields continued to rise on Wednesday.

Germany’s 10-year profitability, a benchmark for the eurozone, has risen to a new high since 2014 at more than 1.35% and has risen in a day.

It continued to grow after data showed that the eurozone economy grew much faster in the first quarter of the year than in the previous three months, despite the impact of the war in Ukraine. The yield on Irish 10-yield bonds also rose sharply to 1.94%.

Italy’s yield for 10 years was up 3.45%, but below the highest rate since 2018 of 3.55% earlier this week. The risk premium for 10 years of Italian debt over Germany was more than 2.1%, although down from the previous week.

Irish Examiner, more Reuters information

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