Main Points
- European Central Bank (ECB) has confirmed a rate hike of 0.25%
- “The outlook remains uncertain, with upside risks for inflation and downside risks for economic growth,” the ECB board said in a statement
- Daragh Cassidy of bonkers.ie said someone with €150,000 remaining on their tracker over 10 to 15 years, their repayments will increase by roughly €17 or €18 a month, or just over €200 per year
Key Reads
- Inflation falls slightly to 3.6% in May as energy costs dip
- ECB moved to rein in Revolut in Europe
ECB hike highlights need for cost of living package - SF
We have more from Cormac McQuinn who has sent us the response to the hike from Sinn Féin.
Its finance spokesman Pearse Doherty said the interest rate hike is “another reason why we need a cost of living package.”
The main Opposition party has been seeking to put pressure on the Government to bring in measures to ease the cost of living for households in advance of October’s Budget.
The Government has been resisting such calls and highlight some €750 million in extra supports brought in amid soaring fuel costs caused by the war in Iran.
Reacting to the ECB interest rate increase Doherty said in a statement: “Interest rates are ineffective tools for managing external shocks like the spike in energy prices since beginning of the war in Iran.
“The problem is that the ECB has a mandate to control prices but has limited tools to do it.”
He added: “What we are really facing is high energy prices from the strait of Hormuz being closed – An interest rate hike is heaping more pain on households and the wider economy.
“This is more pressure on workers and families and another reason why we need a cost of living package.”
Harris eyes budget measures in wake of ECB hike
The Tánaiste and Minister for Finance, Simon Harris, has said the Government intends to prepare a budget with a view to supporting families and businesses as he responded to the ECB interest rate rise.
Cormac McQuinn reports that he indicated the budget must include tax relief for people and progress in cutting childcare costs as he also said energy costs have to be examined to “see what we can do”.
Speaking in advance of a meeting of Eurogroup ministers in Luxembourg, Harris reacted to the interest rate hike, saying: “I am very conscious of the concerns that that will present for some households in Ireland and across the European Union.”
He added: “It is in many ways a real reminder of the inflationary impact of the situation in Iran and the of the closure of the Straight of Hormuz.
“And again the greatest economic intervention we could see at this moment in time is the reopening of the Straight.”
Harris sought to reassure people who “feel pressure at the moment in relation to cost” that “the Irish economy is in a good position” of “relative strength”.
He said: “We intend now to prepare a budget that will look at how we can support families and businesses at this challenging time without chasing inflation.”
Harris expressed his belief that it “has to involve a personal tax package” and “progress on childcare” as well as a need for the Government to “look at other areas where there are real structural costs issues including energy and see what we can do”.
He said there would be an opportunity on Thursday to discuss energy with his European counterparts, adding: “Europe has to wean itself off dirty fossil fuel.”
Current crisis risks ‘more persistent and less predictable inflation dynamics’ - EY Ireland
“The ECB has become the first of its peers to tighten policy in response to the recent increase in inflation driven by spike in energy prices associated with conflict in the Middle East,” said Simon MacAllister, co-head of geopolitical strategy at EY Ireland.
He noted that “energy costs remain both volatile and significantly elevated due to the conflict, and higher input prices – in fertiliser and petrochemicals, as well as oil and gas - are expected to continue feeding into broader inflation”.
He added that even if the Strait of Hormuz were to reopen fully, “these pressures would persist for some time as it will take months for supply chains to stabilise and likely 12-18 months for global inventories to be replenished”.
MacAllister added that “unlike previous energy shocks such as in 2022, this one is more global in nature, meaning rising costs are being passed through supply chains rather than staying limited to energy prices alone. This increases the risk of more persistent and less predictable inflation dynamics.”
He concluded by saying that for Ireland, “this decision comes as the economy remains resilient but is beginning to moderate after an exceptional performance in 2025, with higher borrowing costs likely to weigh on both consumer and business sentiment.”
ECB not set on a particular rate path, says Lagarde
ECB president Christine Lagarde started her press conference by noting that war in the Middle East “is generating inflation pressures, and the decision to raise rates is robust across a range of scenarios mapping out how the shock might evolve and affect the medium-term outlook for the euro area.”
She said that in the months ahead the ECB’s interest rate decisions “will be based on our assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path.”
She said that the ECB expects “domestic demand to be weaker than they projected in March as the war weighs on confidence and higher energy costs erode real incomes”.
She suggested that “higher energy costs and lower confidence will dent private investment in the short run, but it should be underpinned by firms investing in new digital technologies. Governments spending more on defence and infrastructure should continue to support public investment. These factors are expected to provide some cushioning against the fallout from the war.”
She said that “inflation expectations over shorter horizons remain well above levels before the outbreak of the war in the Middle East. At the same time, most measures of longer-term inflation expectations stand at around 2 per cent, supporting the stabilisation of inflation around target in the medium term.”
War in Middle East ‘major source of uncertainty’, says ECB
Joe Brennan has been following ECB president Christine Lagarde’s press conference: “The war in the Middle East remains a major source of uncertainty. The longer energy prices stay high, the more likely they are to drive up broader inflation,” she said.
The ECB increased its inflation forecasts and lowered its economic forecasts.
ECB staff now expect headline inflation to average 3 per cent this year, before easing to reach the ECB’s 2 per cent target in 2028.
For inflation excluding energy and food, the rate is expected to average 2.5 per cent this year and edge lower to 2.2 per cent in 2028.
They see euro zone economic growth averaging 0.8 per cent this year, 1.2 per cent in 2027 and 1.5 per cent in 2028.
ECB outlines reasons for move and keeps options open for future
The ECB press conference is underway and this is one of the key takeaways so far.
“The outlook remains uncertain, with upside risks for inflation and downside risks for economic growth,” the ECB board said in a statement.
“The full implications of the war for medium-term inflation and growth will depend on the intensity and duration of the energy price shock, as well as the scale of its indirect and second-round effects.”
Not all doom and gloom say market analysts
While we wait for Christine Lagarde’s press conference, we have some more analysis from closer to home.
“Today’s decision marks a real shift in the rate environment, and for many Irish households, it will mean higher mortgage repayments – and for some, sooner than others,” said Sorcha Timoney, senior mortgage manager with wealth advisers NFP Ireland.
She said tracker customers will feel it almost immediately, and those on variable rates or coming off fixed terms will need to really look at what this means for them. And at exactly what they can do to mitigate future cost pressure.
“Rather than panic or feel disillusioned, we would advise people th at today’s announcement should be seen as a call to action. Even excluding today’s announcement, there are thousands of mortgage holders that are already paying too high an interest rate on their mortgage,” she said.
“Competition is growing and mortgage holders should leverage this. Particularly in light of today’s announcement and the fact that further increases later in the year are likely.
If your home has gone up in value since you first bought it, then your loan-to-value may have improved enough to qualify you for a better rate with your current lender. So while switching lender might be the most cost-effective step for many mortgage holders – some could even stay with their existing lender & still get a better rate.”
The chairman of Irish Mortgage Advisors Trevor Grant meanwhile said that at a time when so many Irish households are already grappling with high living costs – including the significant electricity price increases announced this summer, higher mortgage bills will add significantly to the financial stress which so many homeowners are now under.”
Like others he suggested it might be an “opportune time for borrowers to fix their mortgage, if they have not yet done so. If considering fixing, it would be worth doing so quickly so that you lock your mortgage in ahead of any potential fixed rate rises.”
He said that while many borrowers “will understandably be worried about today’s announcement, it’s important that they are not unduly alarmed.
“Competition and not the ECB is the main influence on home loan rates in Ireland. There is still plenty of competition out there amongst lenders for borrowers to take advantage of, with a number of lenders cutting their mortgage rates since the start of the year.”
Grant suggested that borrowers “should also be mindful that even if rates increase, the full weight of the increases may not be passed onto those on variable and fixed rate mortgages. The last series of ECB rate increases, which was between July 2022 and September 2023, saw the ECB increase rates by 4.5 per cent whereas bank lenders only increased rates by an average of around 2.25 per cent.”
One more rate increase likely before year end
The reaction to the rate hike is continuing to come in with Davy investment strategist Stephen Grissing Davy saying the move “marks a clear signalling by the ECB of its intent to stay ahead of inflation risks while maintaining a measured policy stance.”
He pointed out that it had previously been criticised for “reacting too slowly in 2022, increasing rates after inflation had already climbed above 8 per cent year-on-year, in comparison to the 3.2 per cent level it sits at today.”
He suggested there would be one more similar increase before the end of the year “with any future increases likely to be gradual and carefully calibrated, balancing the more contained nature of current inflation pressures and the ECB’s desire to avoid unnecessarily weighing on economic growth”.
ECB confirms rate hike of 0.25%
There you have it. It has just been confirmed that the ECB has raised its key deposit rate by a quarter of a percentage point to 2.25 per cent. It is the first increase in almost three years and comes as the Iran war is having a broader impact on inflation than the spike this year in energy prices. The bank also increased its main lending rate, to which ECB tracker mortgages costs are linked to 2.4 per cent.
The reaction has already started to come in.
“Today’s rate hike was widely expected. But the bigger question now is how many more increases we can expect over the coming months,” said Daragh Cassidy of bonkers.ie.
“At 3.2 per cent, inflation in the Eurozone is already well above the ECB’s 2 per cent target and that’s even before the full effects of the current energy supply shock have filtered through to the economy. As a result, there’s a strong possibility the ECB will raise rates again before the end of the year.”
He said that “much will depend on developments in the conflict with Iran. The longer the conflict continues, the greater the potential impact on energy prices and inflation, increasing the likelihood of further rate hikes.”
Cassidy noted that current inflationary pressures “are largely the result of a supply-side shock rather than excessive consumer demand. So you could question how effective higher interest rates will be in bringing inflation back under control. However, the ECB doesn’t see it that way.”
As to the impact, as we have been saying “anyone on a tracker mortgage will feel the impact almost immediately,” he continued.
“Although the number of tracker customers has gradually declined over the years, there are still likely to be more than 100,000 tracker mortgages in Ireland. These borrowers will see their mortgage rate increase by a quarter of a percentage point within the next month or so. Tracker mortgages are linked to the ECB’s slightly higher main refinancing rate, which will rise to 2.40 per cent from 2.15 per cent.”
He said someone with €150,000 remaining on their tracker over 10 to 15 years, their repayments will increase by roughly €17 or €18 a month, or just over €200 per year.
“Borrowers on fixed-rate mortgages are protected for now, as their repayments won’t change until their fixed term expires. However, lenders may increase their fixed rates for new customers in the coming weeks, particularly if the ECB raises rates again at its next meeting in July,” he continued.
He pointed out that in recent weeks “some of the smaller non-bank mortgage providers have already increased their rates. These lenders are more sensitive to changes in wholesale funding costs, as they rely more heavily on financial markets to fund their mortgage lending.”
“The main banks such as AIB, Bank of Ireland and PTSB, are less exposed because they fund a significant proportion of their lending through customer deposits. However, rate increases from these lenders later in the year can’t be ruled out, particularly if the ECB continues to tighten monetary policy,” Cassidy concluded.
Irish rates eased slightly in April
Ahead of the ECB announcement, it is worth looking at where we stand when it comes to mortgage rates. They remained broadly steady in April, according to data from the Central Bank that was published yesterday.
The average mortgage rate for April was 3.50 per cent which was down slightly from the 3.52 per cent that was recorded in in March, and just above the Eurozone average of 3.45 per cent.
Rates in the Eurozone ranged widely from as low as 2.01 per cent in Malta to as high as 4.28 per cent in Latvia.
It is worth bearing in mind that mortgage rates are likely to increase over the coming months.
Inflation closer to home eases marginally ahead of ECB moves
The rate of inflation dipped fractionally, to 3.6 per cent last month as energy inflation slowed, but rising costs continued to put pressure on consumers and push up the cost of living, reports Ciara O’Brien.
The consumer price index had hit 3.7 per cent in April, the highest since early 2024.
Data from the Central Statistics Office showed inflation was fuelled by education charges, which rose 8.9 per cent over the past 12 months, and clothing prices, which increased by 7.4 per cent.
The increase in education costs was associated with a change in third-level education charges that came into effect in October last year.
Housing, water, electricity and gas rose 7.1 per cent over the same period.
Only the furnishings, household equipment and routine household maintenance subsector showed a decline, falling 0.6 per cent compared to the previous year.
Excluding energy and unprocessed food, the core consumer price index rose by 2.9 per cent over the year, the CSO said.
Why are rates so important in Frankfurt?
Wondeing what is behind the ECB moves?
Wonder no more.
Cliff Taylor writes that when a policy was being discussed at cabinet, the story goes, then taoiseach Garret Fitzgerald - well-known for his tendencies too be a bit of a boffin - was said to have observed :" That’s all very well in practice, but how does it work in theory. "
It may well be apocryphal, though borrowers may have similar feelings about the ECB increase.
How can a central bank have any influence, after all, on the conflict on the Middle East and its impact on oil prices, which is the main factor driving inflationary pressures.
The theory accepts that this is the case, but argues that the ECB needs to act to limit the resulting spread of inflation elsewhere in the economy.
Higher interest rates, by acting as a brake on economic activity, should lower demand and thus price pressures, particularly in areas like services which is a particular concern to the ECB.
It also sends a message to the wider economy - this is meant to influence expectations of future inflation which in turn has an impact on the outturn.
That, at least, is the theory. The risk for the ECB, particularly if the Gulf conflict worsens, is a period of “stagflation” with low growth and high inflation.
Here managing inflation becomes more difficult because doing so further dampens already low growth, though it is worth noting that the ECB’s primary mandate is to control inflation and keep it close to 2 per cent.
What comes next?
Analysis from global financial services firm and FX specialist Ebury says the big question is what comes next.
Today’s move is likely to be an “insurance” hike rather than the start of a sustained tightening cycle, with policymakers expected to keep their options open and potentially pause through July before deciding whether another increase is needed after the summer.
“The market reaction will be shaped by the extent of the forecast revisions and by any comments alluding to how high the bar is for the next hike – and when it could come," said Roman Ziruk, Senior Market Analyst.
“The current situation suggests the bank need not rush: barring a significant flare-up of the Iran war or surprisingly strong indications of second-round effects, the ECB can perhaps sit out the July meeting before deciding whether action is warranted in September. Markets are fully pricing in a move after the summer, and while we are not as convinced, we agree it could be on the table.”
Time to act is now say brokers
Rachel McGovern of Brokers Ireland has said that when interest rate cycles change, they have the potential to deliver changes beyond merely the interest rates, the nature of mortgage products themselves can change.
“The window to act in terms of getting the best rates is closing so we would be advising all mortgage holders who have not reviewed their position to do so now without delay,” she said.
“When the market changed from historically low rates in mid-2022 onwards some of the better long-term fixed interest rate products were withdrawn from the market.”
The vast majority of new mortgage holders are opting for fixed rates with 92 per cent of new agreements, up from 81per cent a year ago, but large numbers will be coming off fixed rates this year, McGovern said.
And while switching has certainly improved there are still too many mortgage holders who are not on the most advantageous rates.
Tracker holders have had the wildest - and sometimes easiest - ride of the lot
There is going to be a lot of talk of trackers today.
Going way back to when that man on the bus exclaimed “I don’t know what a tracker is”, Ireland’s homeowning classes have been split between haves and have-nots.
The haves had the trackers – mortgages tied to European Central Bank (ECB) interest rates – while the have-nots were on variable and fixed rates set by indigenous banks at levels they reckoned the market could bear, irrespective of whether or not they were equitable or affordable.
For well over a decade the tracker holders were on the pig’s back, paying rates of as low as 0.6 per cent and almost never more than 2 per cent. By contrast, variable and fixed-rate holders were routinely paying over 3 per cent, with some paying more than twice that, for home loans.
Then, in July of 2022, things started to turn for tracker holders and it would be hard to exaggerate just how painful that turn was for many already struggling with a deepening cost-of-living crisis.
A total of 10 ECB rate increases since the summer of 2022 took tracker rates up to an eye-watering 4.5 per cent and forced those with mortgage deals they were always told were as precious as gold to pay hundreds of euro more each month to their banks.
Few had any change out of €3,500 when the interest hike impact was spread over a year while many were substantially worse off than that.
Then things went into reverse and there were nine successive rate cuts and while tracker holders were still spending more than they once were, the financial pain eased considerably.
For those of fixed and variable rates, the pain has been fairly consistent all the way through.
What should borrowers do now? The IT Business podcast has the answers
On the latest Irish Times business podcast, Michael Dowling of Irish Mortgage Brokers goes through what the rise in interest rates means for various types of borrowers.
There are a few key messages.
New buyers are clearly better to look at locking in - and might even consider longer terms than the typical three years.
Those on old style variable rates would, in most case, save money by taking one of the fixed rate offers in the markets, as well as protecting themselves from possible rises as ECB rates go up.
People on trackers will take a hit, though many will still be on rates around 3.25 per cent after the ECB increase, which is still OK by historical standards. Have listen here.
Mortgage holders do hold some cards even when rates climb
It is worth noting that even in an era of rising rates, people have options.
As Martina Hennessy points out, the biggest risk for some borrowers isn’t a rate rise itself but assuming they have no options.
“The market currently remains competitive, with rates starting from 3 per cent and products rewarding those with lower loan to values. This means that homeowners who have seen the value of their home increase could be in a position to unlock more competitive rates.“
She says that mortgage holders value security and with the expectation that we could be facing into a period of upward rate movement “one of the biggest changes we’re seeing is homeowners on fixed rates who are no longer waiting until the term ends. They are engaging now to understand their options and see if a switch makes financial sense.”
And does it make sense?
Well, she says that for some borrowers, reviewing their mortgage can deliver savings measured in thousands rather than hundreds of euro.
As we have said a 0.25 per cent increase will add around €14 per month for every €100,000 borrowed over a 30-year term.
“For the average mortgage of just over €360k, that equates to approximately €50 extra in repayments per month or €600 per year. And if rates rise three times, as predicted by some analysts, that’s €1800,” Hennessy says. “Your existing lender should absolutely be part of the conversation, but it shouldn’t be the only conversation.”
Fresh hikes likely to hurt even more
There has been a lot of commentary coming in ahead of the ECB move.
According to Martina Hennessy of online brokers doddl.ie, the latest round of rate increases is likely to hurt more than that last round which started in the immediate aftermath of Russia’s invasion of Ukraine in the spring of 2022.
“The average mortgage has increased by almost €80,000 in just three years," she said.
“That means the same rate increase today hurts more than it would have when rates began to increase in 2022 to curb inflation.”
She pointed out that “not all mortgage holders are equally exposed. The 130,000 tracker customers will feel any ECB increase first, followed by variable rate customers, while those coming to the end of low fixed rates could face higher repayments when their current term expires.”
What does a hike mean in cold hard cash terms?
The quarter of a percentage point when it comes will bring financial pain to just over 100,000 tracker mortgage holders in Ireland almost immediately.
Every 0.25 per cent increase adds around €14 on to the monthly repayments on a €100,000 outstanding and someone who has €200,000 left to repay can expect to be worse of by close to €30 a month or €300 over the course of a year.
But that is only part of the story. If, as is widely expected, the ECB increases its rates on three occasions over the next seven or eight months, than many homeowners will be worse off by the guts of a grand annually.
And it is not just tracker holders who have cause for concern.
While tracker holders will feel the pain of a hike pretty much immediately, the banks will start increase their variable rates and their fixed rates for new customers. That means 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.
ECB rate hike has been widely flagged for months
At exactly 1:15pm the European Central Bank will announce that its rate rollercoaster has changed direction again after nearly two years of rate cuts which came after two years of rate increases.
There was a time when ECB moves were as closely guarded as the Third Secret of Fatima but just as that secret was eventually revealed, so too have the plans of the ECB been exposed well ahead of time.
What we know is a rate hike of 0.25 per cent is coming in response to inflation climbing across the EU.
The bankers in Frankfurt have a magic number of 2 per cent when it comes to inflation and with the rate across the EU currently standing at 3.2 per cent (it is a little bit higher than that in Ireland) the ECB feels like it has to act.
The smart money is on this being one of three rate increases before the end of the year but we will have to wait until later this afternoon to get a sense of the plans from the head of the ECB Christine Lagarde.
