Borrowers will face further increases in mortgage repayment costs from next month, following yesterday's decision by the European Central Bank (ECB) to raise interest rates. Marc Coleman, Economics Editor, reports.
The ECB increased rates by a quarter of a percentage point - stepping back from a threatened half a percentage point increase - in its third rate hike since December.
The ECB president, Jean-Claude Trichet, warned that further rate increases were likely later in the year citing fears over inflation in the eurozone as a whole.
Banks and building societies will start to pass on the interest rate rise in the coming weeks.
Mortgage repayment costs have now risen significantly as a result of yesterday's rise and the two preceeding increases since December, economist Austin Hughes of Irish Intercontinental Bank (IIB) said yesterday
"Someone taking out a typical €250,000 mortgage will have seen their monthly repayments jump by just over €100 since December when today's ECB rate rise takes effect. More worryingly, today's comments by Jean Claude Trichet suggests these borrowers could face up to another €100 per month jump in monthly loan repayments in the next six to nine months".
Yesterday's rate rise will also add to inflation, which the latest data show is now close to 4 per cent.
The Central Statistics Office said the rate of inflation rose for the fifth month in succession in May to reach a three-year high of 3.9 per cent. The rise was attributed to higher energy costs and price rises in the services sector.
Higher mortage repayments as a result of two previous interest rate increases by the ECB also contributed. Yesterday's interest rate increase came too late to affect the May inflation figures, but is expected to feed through into June's figure and may damage consumer confidence.
A recent joint IIB/ESRI survey of consumers suggests that fears of higher inflation and interest rates is already denting confidence.
The survey index for May fell sharply from 98.8 in April to a 92.3, the third significant fall in four months. Mr Hughes predicted that yesterday's rate rise would add to future inflation. "Allowing for a small amount of fixed rates and some inertia, a quarter point mortgage rise will raise Irish inflation by around a quarter per cent".
Ulster Bank economist Pat McArdle said that while other factors would act to moderate inflation in coming months, further interest rate increases would keep inflation strong in 2006 and 2007
"Putting all this together, the average inflation rate for 2006 works out at 3.8 per cent. Our forecast for next year is only slightly lower at 3.6 per cent".
AIB Global Treasury Chief Economist John Beggs said that the latest move was a positive development for the global economy.
"The ECB's decision to raise rates by 0.25 per cent rather than by 0.5 per cent has given a short term boost to the US dollar. However, this is likely to be reversed in the short term. The ECB's moderate pace of tightening may also give some relief to equity markets which have been shaken by fear and uncertainty in recent times," Mr Beggs said yesterday.
Mr Beggs added that the ECB would most likely repeat yesterday's quarter per cent increase in interest rates in September and December and that further rate rises could occur next year.