The European Central Bank (ECB) is about to deal a major blow to homeowners, with a second sharp interest rate hike today.
Rates could rise as much as 0.75 percentage point in a move that would add €900 to the annual cost of repayments on a typical follow-on mortgage. It follows a 0.5 percentage point increase in July.
The combination of a significant increase this week on top of the increase in July would mean that a family with a €200,000 tracking fee would have to pay an additional €117 a month.
For a full year, this would equate to €1,400 in higher payouts.
There are close to half a million mortgage account holders, either tracked rate or variable rate, who are vulnerable to higher European interest rates.
The three major banks saved variable-rate customers from the ECB hike in July, but that’s not expected to happen this time. Variable rate customers with a €200,000 25-year mortgage will face an additional €78 in monthly installments in the event of a rise of 0.75 percentage points.
Over a year, this equates to an additional €930 in mortgage costs.
Economists said they weren’t sure the rate increase today would be 0.75% (it could be another 0.5 percentage point increase), but they still expected rates to rise 1.5 percentage points by the end of the year. .
Goodbody Stockbrokers economist Dermot O’Leary said it was a coin toss if rates rose 0.5 or 0.75 percentage points.
Wholesale money markets were pricing in the higher increase, he said, but a severe energy-related downturn could mean a 0.5 percent rate would be adopted.
However, Mr O’Leary said he expected the ECB’s key refinancing rate to be at 2% by the end of this year, so it was a question of when, rather than if, aggressive rate hikes would be implemented. rate.
Dr Tom McDonnell, co-head of the Nevin Economic Research Institute think tank, said the biggest rate hike was most likely because “the ECB is spooked by how quickly the euro has fallen below the dollar “.
Independent economist Austin Hughes said money markets were pricing in a “massive rate hike.”
He said there was a chance of more rate hikes next month and in December as the ECB tries to rein in inflation.
Several ECB governors have recently been quoted as advocating a big rate hike.
Speaking at the Jackson Hole annual central banking symposium in Wyoming late last month, ECB board member Isabel Schnabel said the ECB needed to show “determination” to rein in price increases.
Under this approach, the central bank would respond “more forcefully to the current bout of inflation, even at the risk of lower growth and higher unemployment,” Schnabel said.
In his speech, he insisted on the need for people to “trust” that the ECB will recover its purchasing power.
The Frankfurt-based institution is already catching up with other central banks, including the US and Britain, which have started raising rates harder and faster in response to inflation.
The so-called forward guidance issued by the ECB, which limited its margin of action, has been eliminated.
Policymakers would now make their decisions “meeting by meeting”, ECB President Christine Lagarde announced in July.
The ECB’s 25-member governing council surprised with a 50 basis point hike at its last meeting in July, the first rate hike in 11 years.
ECB chiefs are keen to rein in inflation, which is running at 9.1% in the currency zone. They hope that raising interest rates will help quell price increases, although several economists have said such a move will do nothing to stop rising energy prices.