General higher rates may undo new dawn for variable mortgage holders
Wedge between rates here and elsewhere may shrink just as ECB starts raising rates
The banks in Ireland have maintained the higher rates here reflect the elevated risk of lending into the Irish market but in reality the premium is there to compensate for loss-making tracker portfolios
The gouging of variable rate mortgage holders by Irish banks may soon be at an end, but there’s a sting in the tail.
Since the crash banks here have been charging their variable rate customers excessive rates – twice the euro zone average – with the seeming connivance of the Government, their main shareholder.
The banks have long maintained that the higher rates reflected the elevated risk of lending into the Irish market but in reality the premium was there to compensate for loss-making tracker portfolios.
At the launch of the Economic and Social Research Institute’s Spring Commentary this week, Prof Kieran McQuinn described it as “a breakdown in the monetary policy transmission mechanism” which, he said, was a fancy way of saying that the policy rates set by the European Central Bank (ECB) were not being adopted here.
However, he noted that this “wedge” between rates here and elsewhere – so long the source of controversy – may finally be about to come down as healthier banks compete with each other again, undercutting rates in the process.
While this is obviously a good thing for variable rate customers, it may unfortunately coincide with an era of rising interest rates generally.
The US Federal Reserve raised interest rates on Wednesday, and forecast two more hikes for 2018 in its first policy meeting under new Fed chairman Jerome Powell. Meanwhile the Bank of England is gearing up for a rate hike in May. When the ECB follows suit is an open question, but the speculation is mid-2019.
How far this process will go and how much pain will be heaped on mortgage holders depends on the wider euro zone economy and indicators like inflation.
“As economy continues to improve, as balance sheets improve, as personal income levels increase, the hope is people will get to a situation where they’ll be able to accommodate these rises,” McQuinn said.
Either way, it seems variable rate mortgage holders here will miss out on the ultra low rates.