ECB’s planned March rate hike will not be last, Lagarde signals

Move by central bank to increase rates on Thursday will have automatic impact on 240,000 Irish tracker mortgages

The European Central Bank (ECB) raised its interest rates for the fifth time in a row on Thursday, pushing its main lending rate up by half a percentage point to 3 per cent, a level last seen in 2008, as it continues to fight inflation even amid signs it is easing.

ECB president Christine Lagarde also said the bank’s governing council intended to increase its main rates by another half point next month – and indicated it would continue to rise beyond then as it focused on bringing inflation back to its 2 per cent target.

Asked by reporters whether March might be the high point for ECB rates, Ms Lagarde said: “No, no, no. We know that we have ground to cover. We know that we are not done.”

Thursday’s increase, which was in line with economists’ expectations, will be passed on automatically to an estimated 240,000 Irish tracker mortgage loans and will likely prompt banks to increase other home loan rates in the coming weeks, according to mortgage brokers.


On its own, the 0.5 percentage point January rate hike will add another €600 a year to the mortgage bills of a homeowner on a 15-year tracker mortgage of €200,000, according to Joey Sheahan, head of credit with online brokers

AIB announced within hours of the ECB decision that it was increasing fixed and variable rates. Mortgage brokers predicted others would follow.

“If rates continue to increase throughout the year, we will likely see a complete repricing of fixed and variable rates offered by lenders, so all mortgage holders should be looking at their current situation assessing what the best move is for them,” Mr Sheahan said.

The ECB also increased its deposit rate by half a point, to 2.5 per cent, prompting AIB to improve its offering to savers.

The ECB deposit rate stood minus 0.5 per cent and the main lending rate was zero before the Frankfurt-based institution started a cycle of raising the cost of borrowing last July.

The ECB decision came within hours of the Bank of England raising its base rate by half a point to 4 per cent, making its 10th consecutive hike, and a day after the US Federal Reserve pushed through a quarter-point increase.

Euro zone inflation eased for the third straight month to 8.5 per cent in January, driven by a fall in energy costs even as food and industrial goods kept upward pressure on prices, according to figures released on Wednesday by Eurostat.

However, the pace of consumer price growth was still more than four times the ECB’s target. Inflation had been running at 9.2 per cent in December.

“The governing council will stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2 per cent medium-term target,” Ms Lagarde said.

“Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations. In any event, the governing council’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.”

In December, the ECB decided to gradually start reducing its approximately €5 trillion portfolio of bonds bought during previous stimulus drives. Reinvestments will be scaled back so the pile shrinks by €15 billion a month from March until the end of June, with the subsequent pace to be determined “over time”.

Has the Central Bank let down Irish mortgage holders?

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Brendan Burgess joins the podcast to explain his critique of Central Bank policy on mortgage interest rates. It comes after Central Bank governor Gabriel Makhlouf told an Oireachtas committee that Irish banks should increase interest rates to reflect increases applied by the European Central Bank. Plus: Cliff Taylor and Eoin Burke-Kennedy look at the latest economic trends.

The three Irish mainstream banks had generally focused since the ECB started to increase rates in July on increasing rates on new fixed loans, albeit at a much slower pace than the central bank.

However, AIB on Thursday became the first of the three to increase variable rates. Still, its new variable rate of 3.5 per cent on loans for up to 80 per cent of the value of a property remains among the lowest in the market for this product.

Non-bank lenders have been more active at increasing interest rates in recent times, as they have been more affected by a spike in lending costs on international bond markets ahead of ECB official rate moves.

“The main thing mortgage holders and those aspiring to get a mortgage need to do is to concentrate on getting the best interest rate they can secure, especially while there are still reasonable rates available in the market,” said Rachel McGovern, director of financial services at Brokers Ireland.

She said conditions attached to lending, such as stress tests, were also tightening with indications that lenders would likely face further tightening to guard against potential bad loans, especially in relation to the commercial property sector.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times