Mortgage interest rates could rise by up to 1 per cent by the end of year, putting further pressure on home-owners, following yesterday's confirmation that inflation is continuing its upward path.
The latest figures show that prices rose 5.5 per cent in the last 12 months with inflation now at its highest level for 15 years. The figures were greeted with alarm by Opposition politicians and trade union leaders who said the issue would have to be tackled urgently.
The Irish Congress of Trade Unions is meeting today to discuss the issue, following a motion from SIPTU, calling for a review of the Programme for Prosperity and Fairness (PPF). The ICTU president, Mr Peter Cassells, said the 5.5 per cent figure "reinforces the need for a review".
Fine Gael's finance spokesman, Mr Michael Noonan, said the last Budget and the subsequent measures to make the individualisation plan more acceptable had overheated the economy. Mr McCreevy must now "prepare and introduce a totally different budget for next year, and he must agree to an early review of the PPF", he said.
Labour's finance spokesman, Mr Derek McDowell, said the Government should discuss with the social partners the possibility of a reduction in the standard rate of VAT as part of a tax-relief package.
Prices are also rising across the rest of the euro zone, although at less than half the Republic's rate. Euro zone inflation rose to 2.4 per cent in June from 1.9 per cent in May. Analysts say that means a half percentage point rise in European interest rates by the end of September with another rise possible before Christmas. This would then feed into mortgage interest rate rises here.
Analysts also say that inflation in the Republic could rise to 6.25 per cent or 6.5 per cent by the end of the year. According to Mr Jim Power, chief economist at Bank of Ireland, inflation will reach 6.2 per cent in July before accelerating towards 6.5 per cent and beyond depending on how fast the European Central Bank raises interest rates.
Rising interest rates have already pushed up mortgage interest repayments and local authority rents. Transport, fuel and light also saw large increases on the back of higher oil prices. Food prices particularly meals out, pork and bacon, fresh fruit and vegetables and eggs also increased. Tobacco still shows the highest price rise at 17.5 per cent followed by transport and fuel and light at 8.2 per cent respectively. Services inflation which reflects the booming economy is up 6.7 per cent followed by housing at 6.1 per cent.
SIPTU last night proposed a mechanism which would give the State's two million PRSI workers a £500 pension bond, underwritten by the Government. It would pay a rate of interest tied to gross national product, rather than inflation, making it a more attractive proposition.