Markets dial down expectations for further ECB hikes after half-point increase

Frankfurt’s latest decision comes amid major market turbulence linked to overnight bailout of Swiss lender Credit Suisse

Markets have dialled down their expectations for further interest rate hikes, potentially easing the pressure on Irish mortgage holders, after the European Central Bank (ECB) presented a more benign inflationary outlook while raising concern about ongoing turbulence on financial markets.

Frankfurt pushed ahead with another half-point interest rate hike on Thursday as concerns over the health of the banking system triggered by the overnight bailout of Swiss lender Credit Suisse rippled through markets.

The latest hike, the sixth since last July, lifted the ECB’s main refinancing rate, which affects home loans, to 3.5 per cent. This will feed into higher monthly repayments for mortgage holders, with the State’s 200,000 tracker mortgage holders expected to see an immediate jump in their costs.

Taken together, the six recent ECB rates increases will add about €640 a month to a €330,000 tracker mortgage.


ECB chief Christine Lagarde also hinted at the possibility of another rate hike to come, saying “we are seeing some slight improvement in certain areas [of underlying inflation], but frankly, not a lot”.

“The pace [of monetary tightening] that we take will be entirely data-dependent,” she added.

However, her comments, combined with the ongoing turmoil on financial markets, were interpreted to mean that future rate hikes would be smaller in magnitude.

Investors now see the ECB’s deposit rate, which was lifted to 3 per cent on Thursday, peaking at 3.65 per cent in the short term, compared with an outlook last week of more than 4 per cent. The deposit rate is what the ECB pays to banks that hold money on deposit while the refinancing rate is what banks pay the ECB when they borrow from it.

The more benign outlook for rates was also linked to the ECB’s new set of forecasts, which suggested it now sees inflation in the euro area averaging 5.3 per cent this year (down from 5.5 per cent previously), 2.9 per cent in 2024 and 2.1 per cent in 2025 “as the upward pressures from past supply shocks and the reopening of the economy fade out and as tighter monetary policy increasingly dampens demand”.

However, the central bank cautioned that its projections were finalised in early March before the recent emergence of financial market tensions.

“As such, these tensions imply additional uncertainty around the baseline assessments of inflation and growth,” it said.

The ECB’s rate decision came as European markets recovered from a dramatic sell-off on Wednesday, when fears over the health of Credit Suisse, one of Europe’s biggest banks, sank indices and wiped billions off the value of stocks.

Markets recovered somewhat on Thursday after the Swiss National Bank, the country’s central bank, said it was willing to provide Credit Suisse with a 50 billion Swiss franc (€50.7 billion) loan.

“The governing council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area,” the ECB said.

Rachel McGovern of umbrella group Brokers Ireland said the situation was very worrying for the vast majority of mortgage holders, not just tracker mortgage holders.

“There are about 315,000 borrowers, including tracker mortgage holders, on variable rates. The remaining 400,000-plus mortgage borrowers are on fixed rates, but over six in 10 are fixed for less than three years,” she said.

“Many of them will be exiting these fixed rates in the near future and will be coming out into a rising mortgage environment with no certainty around where rates are going to end up,” she said.

While Irish banks have been increasing mortgage rates since the ECB started to hike official borrowing costs in July, they have lagged behind most euro zone banks because they had a higher starting point and domestic lenders have received a major income boost on their deposits. The three remaining Irish banks had €67 billion of surplus money stored with the Central Bank as of the end of last year.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times