MORTGAGE rates are on the way up, with banks and building societies preparing to add around a quarter of a percentage point to their main variable rates of interest.
The Irish Permanent has already raised its rates, increasing its main variable mortgage rate from 6.75 per cent to 7 per cent and also increasing other rates. Other financial institutions are expected to announce similar increases over the coming days.
For most borrowers the impact of the latest rise in interest rates will be fairly modest, typically adding around £6 to monthly repayments on a 20-year mortgage of £40,000.
A bigger increase in Irish rates was averted yesterday following a decision by the Bundesbank to cut key German interest rates. Commentators had expected Irish banks and building societies rates to rise by up to a half of one percentage point, in response to higher wholesale interest rates in the Dublin market.
But with European rates now expected to remain low for some time, financial institutions have decided on a smaller increase. Irish Permanent treasurer, Mr Michael Torpey, said the lower increase reflects a hope that benign international conditions will lead in due course to lower Irish money market rates".
Interest rates on the Dublin money market continued to trade at just over 5.5 per cent yesterday, the trigger level for an increase in retail rates.
Wholesale rates have remained at these levels for almost three weeks now indicating an imminent rate rise.
However, such a move has been strongly opposed by the business community, which had urged the financial institutions not to increase rates for borrowers.
The Small Firms Association has said such a move was unwarranted given the underlying strength of the Irish economy. None of Ireland's economic indicators support or vindicate an increase in interest rates," SFA director, Mr Brendan Butler said
But the Central Bank of Ireland gas been indicating for some time, now that it would be happy to see bank and building society rates rise.
The bank has stated it is concerned about the strength of credit growth in the economy, particularly the high level of new mortgages being taken out, which it believes is fuelling inflation.
Higher interest rates would also help keep the Irish currency trading within a narrow range against the major European currencies.
The banks have been looking to the German Bundesbank for direction on interest rates. Yesterday it announced a larger-than-expected cut in its main money market interest rate, triggering interest rate cuts in other European countries.
The bank said it was cutting its short-term securities repurchase rate, or repo rate, from 3.30 per cent to a historically low level of 3 per cent.
Its official discount and Lombard rates - the floor and ceiling for German money market rates were steady at 2.50 per cent and 4.50 per cent respectively, in line with economist's expectations.
Other European central banks, keen to cut credit costs to boost economic growth, quickly followed the Bundesbank's lead. The Bank of France responded by immediately cutting its intervention rate to 3.35 per cent from 3.55 per cent.