ECB rate hike puts borrowers under more pressure

Homeowners face higher mortgage repayments following the European Central Bank's decision to raise interest rates for the second…

Homeowners face higher mortgage repayments following the European Central Bank's decision to raise interest rates for the second time in four months. At a meeting of its governing council in Frankfurt yesterday, the ECB increased its base interest rate by a quarter of a percentage point, bringing its key lending rate to 2.5 per cent.

The announcement coincided with the publication of a report from the Organisation for Economic Co-operation and Development (OECD) suggesting that the Irish housing market is overvalued but unlikely to crash.

If mortgage lenders pass on the rate rise to borrowers, the ECB's move will add €15-€50 to typical monthly mortgage repayments. Repayments will automatically rise for some borrowers on tracker mortgages.

The move follows a quarter-point rate rise in December, the first in five years. There could be further hikes for mortgage holders later this year, as ECB president Jean-Claude Trichet hinted at additional interest rate increases during 2006, saying rates were still at very low levels.

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"We will continue to monitor closely all developments with respect to risks to price stability," he said.

Yesterday's rate rise would help ensure that inflation in the euro zone remained in line with the ECB's target , Mr Trichet said. Euro-zone inflation is now expected to average at 2.2 per cent this year, up from a forecast of 2.1 per cent in December.

The ECB was also more optimistic yesterday about economic growth, revising its forecast for euro-zone growth to 2.1 per cent of GDP, up from an earlier prediction of 1.9 per cent.

IIB Bank chief economist Austin Hughes said he expected the bank to add another half a percentage point to its base rate in 2006, but he warned that if the euro-zone economy continued to grow strongly, there would be a risk of even higher increases.

Estate agents yesterday downplayed the impact of the rate hike on the property market, saying it would continue to perform strongly this year.

The OECD report described the housing market here as "very buoyant", but added that tax advantages and "relatively lenient" bank lending policies may have helped it to become overvalued.

Green Party finance spokesman Dan Boyle said the ECB decision was the second hammer-blow to homeowners and would hit them hard.