More pain for mortgage holders as ECB imposes 10th lending rate increase

Institute increases rate to 4.5% in bid to curb inflation across euro zone

The European Central Bank (ECB) raised its main lending rate to 4.5 per cent on Thursday, the 10th increase it has imposed in just over a year.

It is the latest move in the most aggressive series of rate hikes in the bank’s history and comes as it struggles to bring inflation under control across the euro zone.

In a statement the ECB suggested rates have now reached their peak and if they are “maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”

Speaking to reporters after the rate increase was confirmed ECB president Christine Lagarde said the focus “is probably going to move a bit more to the duration, but it is not to say – because we can’t say – that now that we are at peak.”


She stressed that the prospect of a future cut in borrowing costs “was not even a word that we have pronounced”.

She welcomed a decline in inflation and said the ECB wants it “to continue to decline. We’re doing that not because we want to force a recession, but because we want price stability.”

New forecasts by ECB staff presented on Thursday were a key source of input for the decision. Ms Lagarde said that the economy will stay “subdued” in coming months. “We are clearly in a period of slow and sluggish growth,” she said. “The difficult times are now.”

The ECB’s new inflation forecast predicts that the inflation rate will average above 3 per cent next year, which is higher than expected and above the average market forecast of 2.7 per cent. It is also above the 2 per cent target for inflation the ECB has set.

The latest quarter of a percentage point increase is in line with what many economists had expected and will bring more financial pain to tens of thousands of tracker mortgage holders in Ireland almost immediately.

People in the market for homes, those coming off fixed rates and borrowers whose mortgages are held by mortgage services providers will also be impacted by the rate increase in the months ahead.

Each quarter-point increase adds about €25 to monthly repayments on a tracker mortgage with a 1 per cent margin over the ECB rate and has €200,000 outstanding,

There are around 315,000 tracker mortgage and variable rate mortgage holders and in around a quarter of a million borrowers on fixed rates which are in place for less than three years.

Many of the latter group will be exiting these fixed rates in the near future and face much higher rates than they are accustomed to.

ECB interest rates have already risen nine times since last summer, a cumulative increase of 4.25 percentage points.

The ECB’s deposit rate before the current hike to 3.75 per cent and its so-called refinancing rate, from which Irish tracker mortgages are priced, stands at 4.25 per cent. Today’s 0.25 point rise brings the average tracker rate to 5.6-5.7 per cent.

People with large tracker mortgages have seen their monthly repayments climb by in excess of €500 but the average rise has been in the €250-€300 range.

The wider picture for borrowers is that interest rates now look to be at, or approaching their peak and there is a strong chance that this will be the top of the cycle although it is hard to predict when rates are likely to fall.

Recent economic growth indicators for the euro zone have been poor, particularly in the manufacturing sector, and the European Commission this week cut its gross domestic product growth forecast for the EU this year from 1.1 per cent to 0.8 per cent, with Germany in a downturn. Business borrowing has also fallen sharply as interest rates have risen.

In a statement the ECB said. that while inflation “continues to decline but is still expected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its 2 per cent medium-term target in a timely manner”.

It projected that average inflation for the euro zone for the rest of the year will be 5.6 per cent in 2023, falling to 3.2 per cent in 2024 and 2.1 per cent in 2025.

This is an upward revision for 2023 and 2024 reflecting a higher path for energy prices.

“Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target,” the statement said.

It stressed that its future decisions “will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary. The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, the Governing Council’s interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.”

Joey Sheahan of online brokers said that while the latest increase would increase pressure on many mortgage holders, it is now “unlikely that we will see any further increases this year. Hopefully, the next movement we see from the ECB will be downwards and maybe sometime next year.”

He said the uncertainty of interest rate increases of 4.5 per cent over the past 14 months has “wreaked havoc with existing mortgage holders and house-hunters alike” and noted that the latest increase means that since July 2022, existing tracker mortgage holders have seen their repayments increase by €491 monthly or €5,892 annually, based on a €220,000 mortgage with 15 years remaining.

“Higher interest rates have restricted how much house-hunters can borrow as the amount of demonstrated repayment capacity banks want to see has increased by as much as €600 monthly for a €300,000 mortgage meaning banks want to see mortgage applicants save a whole lot more each month.” Mr Sheahan added.

Ronan Brennan of Delta Capita said mortgage holders with variable rate mortgages are also likely to feel the pressure of today’s rate rise with banks set to rethink their policies in such rates “now that they have increased deposit rates”.

He noted that for banks “the impact of ongoing and sustained loan interest rate rises is likely to increase the level of missed payments in their performing loan book. It is also likely to really challenge those customers already struggling with existing arrears or who have previously been in arrears. Customers who have fallen behind on their mortgage repayments in the past could therefore now fall back into arrears despite having managed to resume making repayments in recent years and so banks could see a reverse in the progress made on some re-performing loans.”

Conor Pope

Conor Pope

Conor Pope is Consumer Affairs Correspondent, Pricewatch Editor