The real danger for Irish borrowers is that interest rates are increasing gradually rather than sharply, writes Marc Coleman, Economics Editor.
Drop a frog in a pan of boiling water and so sudden is the change in its body heat that it jumps right out and survives.
Put it in tepid water and gently bring it to the boil and it will certainly notice a change but so gradual is the change that it stays in the water until dead.
The European Central Bank (ECB) yesterday opted to turn the heat up under Irish borrowers in a gradual way by raising rates by a quarter rather a half a per cent, with further gradual increases promised in the future.
As a recent slump in consumer confidence proves, borrowers are noticing. But credit statistics also prove they are not yet jumping.
The real danger is that, while appropriate for the euro zone, for the Irish economy ECB rate rises are too little too late.
Instead of jumping out of the pan, Irish borrowers may be lulled into complacency. Some time next year we may find ourselves in deep hot water with no way out.
And even if modest in economic terms, the criticism made of yesterday's rate move by Labour senator and former finance spokesman Derek McDowell suggests that the political impact could be interesting.
As far as the economy is concerned, rate rises have had little impact so far.
According to the latest Central Bank of Ireland credit statistics, non-Government lending keeps growing by around 30 per cent (ironically, far lower euro zone lending growth rates, 11.4 per cent, have prompted the ECB's latest rate rises).
According to Irish Intercontinental Bank chief economist Austin Hughes, for a typical mortgage of €250,000 each quarter point rise costs the borrower an additional €35 per month. The implied €70 loss to the average punter from the two rate increases to date is modest and this probably explains why borrowing continues to grow.
In the economy as a whole, Mr Hughes estimates that a 1 per cent increase in interest rates - it will be achieved by the time of the ECB's next rate rise, most likely in September - withdraws €1.1 billion from the economy
Against this must be set the €500 million increase in interest paid to savers. But despite being a substantial €600 million, this net withdrawal from the economy will be offset by a rise in after-tax income of €7 billion on the back of SSIAs and general pay increases.
Reduce consumer spending they may do, but the effect will be drowned out by other factors.
Deeper fears relate to the housing market. A sharper rate rise yesterday might have slowed the property market by giving borrowers a sharp jolt. But like the frog in the pan, the sheer moderation of the ECB may prevent house buyers from taking action until it is too late.
As of April - one month after the ECB's second rate rise - house prices were still growing by 1.4 per cent per month and by over 12 per cent a year.
Here the problem is not that, by being too severe, ECB rate rises will hurt the housing market, but rather that by being to modest - at least in Irish terms - they will not have any impact at all.
But at least two effects of the ECB's monetary tightening could be both profound and long-lasting.
Yesterday the Central Statistics Office confirmed that inflation has risen for the fifth month in a row, from 2.5 per cent in December to 3.9 per cent in May.
By raising the cost of mortgage repayments, which are included in the Consumer Price Index, the ECB has caused just over a half a percentage point of this rise. As a rule of thumb, each quarter point rise in interest rates adds about a quarter percentage point to the rate of inflation.
The consensus is that further rate increases over the coming year will add a full percentage point to the rate of inflation. While other factors, such as moderating oil prices and a stronger euro, will cool inflation, rate increases should help inflation to stay close to 4 per cent this year and next: wiping out any real gain implied by the 10 per cent pay increase over 2½ years to be agreed by the social partners.
When inflation reaches 4 per cent it can trigger dreaded so-called "second-round effects". This phenomena occurs when trade unions factor in rising inflation into demands for higher wage increases, creating a vicious circle of rising prices and wages.
Yesterday's inflation figures and interest rate decisions will not make it any easier for the social partners to pin down a final agreement.
And even if they do, rising inflation will make it harder to enforce it at local level.
But the political impact of yesterday's decision may be the most significant.
The level of house prices has already become an uncomfortable political issue for the Government, linked, as that level is, to the role of investors in the property market and the extent of tax relief available to them. There is also a link to the rising burden of stamp duty.
Rate increases will add another €100 per month to the typical mortgage holder's repayment costs, coinciding exactly with 12 months leading up to the election.
Mr Hughes is right to note that "while higher mortgage costs could hit a small number of borrowers hard, they shouldn't threaten to derail the Irish economy or the property market".
What they might, derail, however, is the Government's electoral chances.
As Mr Hughes notes: "Our estimates suggest that as many as 50,000 mortgage borrowers face a notable weakening in their household finances this year as a result of higher borrowing costs. It is fairly clear that a number of recent purchasers who have stretched themselves to get on the property market will find the rising mortgage costs particularly threatening."
As at least one politician has noted, 50,000 borrowers translate into an awful lot of votes.Senator McDowell had this to say about yesterday's rate rise: "Shouldn't we take time to ask is it really necessary? Shouldn't we at the very least have a decent debate about the matter? Because, make no mistake, the stakes are very, very high."