Interest rate rises could affect Ireland more than other countries - ESRI

Irish consumers could feel the pinch of a European Central Bank (ECB) interest rate rise more than those in other European economies as a result of our high dependency on variable rate mortgages, the Economic and Social Research Institute (ESRI) has warned.

Data from the Central Bank of Ireland recently showed that approximately 86 per cent of mortgages are on variable rates and, as interest rates in Ireland are already higher than other eurozone countries, those mortgage holders could end up paying significantly more than their EU counterparts.

Following the global financial crash, the ECB reduced interest rates but that reduction wasn’t applied to the full extent by Irish lenders.

As a result, interest rates on new house purchases in Ireland have been consistently higher that other countries on the continent. As of August 2017, those interest rates were nearly 1.2 per cent higher than the median of those other eurozone countries.

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Citing other research, the ESRI went on to warn that a rise of between 1 and 2 per cent in interest rates reduces a borrowers disposable income after debt repayments by between 2 and 4 per cent. “As these borrowers are highly indebted, any significant rate reversal would inevitably put pressure on their ability to service loans,” it said.

Despite the relatively negative outlook for Irish households, the ESRI notes that banks may not choose to pass on the full amount of interest rate rises, instead absorbing some of the pressure as they aim to grow market share.

However, if that’s not the case, “it is likely ECB policy rate normalisation would have a more negative effect on the Irish economy than would be the case for other European economies,” the ESRI concluded.