ECB set to hike interest rates to 4.25% with further increases possible

The European Central Bank (ECB) will keep the door open for another rate increase in September, after pushing through a widely-flagged hike on Thursday that will push up borrowing costs for households and businesses, according to analysts.

The ECB is expected to increase its main interest rates by a further quarter of a percentage point on Thursday, taking its main rate for pricing mortgages to 4.25 per cent. It will be the ninth straight increase and complete a year of ever-increasing costs for borrowers. The bank started its current bout of tightening at its July meeting last year. That was the first increase in more than a decade, as central banks around the world sought to tame runaway inflation.

Economists at Bank of America said the ECB “will be unlikely to commit one way or another” on what it will do in September, as the organisation’s president Christine Lagarde points out that any future moves will be dependent on data that comes through in the meantime on inflation and lending activity.

“With focus still mostly on underlying inflation, the door for a September hike will remain open in our view,” they said.

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While headline euro zone inflation fell to 5.5 per cent in June from 6.1 per cent a month earlier, core inflation – which strips out volatile items such as energy and food – actually rose slightly to 5.5 per cent, according to Eurostat, the EU statistics agency. The ECB inflation target is 2 per cent, with higher inflation spurring rate rises.

An ECB bank lending survey published this week “showing the sharpest decline in credit demand from European companies on record will give the governing council pause for thought, showing past rate hikes are already having a marked impact,” said Davy economist Conall Mac Coille.

Daragh Cassidy, head of communications at Bonkers.ie, said that while a rate increase on Thursday has been well signposted, “that doesn’t ease the burden on those impacted”.

[ Who is most at risk with mortgage rates set to rise again? ]

The increase heightens the pressure on borrowers, many of whom are already grappling with repayments that have increased by hundreds of euro over the past year and the wider cost-of-living crisis. Each quarter point increase adds about €25 to repayments on a tracker mortgage with a 1 per cent margin that has €200,000 outstanding, Mr Cassidy estimates.

Unlike tracker mortgages, which were at rock bottom rates until last year, Irish banks in general have been slow to up interest rates on variable mortgages. That is unlikely to last, while borrowers about to roll off fixed rates may be the most vulnerable at this point.

“Those who are due to come to the end of their fixed rate within the next two years need to start budgeting for higher repayments,” Mr Cassidy said. “The rate they’re paying now is likely to be a lot lower than the rate they’ll get when they come to re-fix. For example, anyone who took out a fixed rate over the past three or four years will likely be paying a rate of between 2 per cent and 3.5 per cent. Most fixed rates are now between 3.75 per cent and 5.50 per cent and are likely to go higher after today’s announcement,” he added.

By the end of the year, the cheapest fixed rate on the market is likely to be more than 5 per cent compared with just 1.9 per cent this time last year, Mr Cassidy warned.

Still, savers may start to see increased deposit rates, with the best offers from the main banks likely to near 3 per cent by the end of the year from 2 per cent now, Mr Cassidy said.

Bank of Ireland moved on Wednesday to launch a two-year term deposit product with a 2 per cent annual rate for personal business customers, as banks come under mounting pressure to pass on some of the recent central bank rate increases to savers.

The bank has also increased the rate on 31-day notice accounts by 0.47 of a percentage point to 0.5 per cent.