Mortgage interest rates will rise again after the European Central Bank increased its rate by three-quarters of a percentage point to 1.25 per cent* on Thursday.

The lunchtime announcement means that interest rates have now jumped by 1.25 percentage points since July.

The increase comes as homeowners are already coping with surging energy costs and a general rise in prices, although the Irish inflation figure fell for the first time in seven months — to 8.7 per cent from 9.1 per cent — when the Central Statistics Office released new data earlier on Thursday.

It means homeowners with tracker mortgages, which automatically follow the ECB rate, will see their repayments rise from next month.

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The increase will amount to around €34 for every €100,000 outstanding on their loans for a mortgage with 15 years left to run to maturity.

Variable loan rates are also likely to rise. Irish banks did not pass on the first half point increase after the ECB decision in July but it is expected they will pass on at least some of the accumulated increase over the coming days.

Data from the Central Bank suggests the average mortgage outstanding is just over €115,000 though there are obviously wide variations. The average mortgage being drawn down by homeowners, according to banking and Payments Federation of Ireland data is around €250,000.

With inflation running at a record high across the bloc and Russia turning off the taps indefinitely on the biggest natural gas pipeline to Europe, the ECB’s move comes at a crucial juncture for the euro zone economy.

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[ Irish banks review non-tracker rates after ECB’s latest hikeOpens in new window ]

The ECB now sees euro zone inflation averaging 8.1 per cent this year against a 6.8 per cent prediction in June, while the 2023 price growth estimate was raised to 5.5 per cent from 3.5 per cent. In 2024, the final year of its projection horizon, inflation is expected at 2.3 per cent, above its 2 per cent target.

President Christine Lagarde also warned that medium-term inflation in the euro zone may turn out to be higher than expected.

She cited as factors in such a scenario a worsening of euro zone production capacity, further hikes in energy and food prices, a rise in inflation expectations above the ECB’s target, or higher-than-anticipated wage rises.

“However, if energy costs were to decline or demand were to weaken over the medium term, it would lower pressures on prices,” Ms Lagarde told the bank’s post-policy meeting news conference.

The ECB has repeatedly underestimated inflation, raising questions about the credibility of the forecasts.

The impact of high energy prices will also weigh on growth, which is forecast to be 3.1 per cent this year against an expectation of 2.8 per cent in June. The ECB, however, slashed its 2023 expansion forecast to 0.9 per cent from 2.1 per cent.

Headline price data is pointing to a further increase in core inflation across the bloc, which meant another big rate hike in September was seen as a foregone conclusion.

Eurostat, the EU’s statistics office, said euro zone consumer prices rose by 9.1 per cent year-on-year in August, the highest since the euro was created in 1999. It was also ahead expectations for 9 per cent and a multiple of the ECB’s 2 per cent target.

The central bank for the 19-country bloc surprised investors with a 50-basis-point (half a per cent) rate hike in July. It had been expected at the time that the bank would move in quarter point increments after several years when the ECB rate was at zero per cent.

ECB board member Isabel Schnabel said recently that the euro-zone inflation outlook had failed to improve since the July rate hike. Her comments reflect concern that inflation is becoming more “broad-based” and that more aggressive action may be needed.

The bank’s chief economist, Irishman Philip Lane, has been on the record expressing his preference for a series of slow and steady increases, though he accepted that economic data might call for a more dramatic intervention.

US Federal Reserve chairman Jerome Powell is scheduled to participate in a discussion on Thursday afternoon — overlapping with Ms Lagarde’s post-decision press conference — with Fed officials soon due to enter into a blackout period before their next rake hike decision at the September 20th-21st meeting.