Has ECB gone too far with hikes?

ECB interest rates rose for the tenth time since July 2022 this week. Another quarter percent hike means paying €300 a year more on a €200,000 mortgage over 25 years if passed on in full. Most tracker mortgages will bear the brunt of the increase. Other borrowers also face a backlog of increases that haven’t been passed on yet, so it seems likely that more increases will be on the way for variable rate borrowers.

The average mortgage rates in Ireland edged above 4% in June to the highest level in a decade. Yet that’s almost 0.5% below the ECB lending rate of 4.5%. Variable rates are traditionally up to 2% higher – which suggests that mortgage rates are heading for at least 5% and even higher, meaning another €1,200 a year hike for average mortgages.

Where ECB rates go from here is open to question but many experts question whether it has gone too far.

Andrew Webb, chief economist at Grant Thornton Ireland, said: ‘The ECB cliffhanger on interest rates was a close call. It is up for debate if the latest increase is a step too far or just far enough. The next few months will be telling.’

Brokers Ireland called on the ECB to ‘pause its aggressive interest rate stance’. The body reckons that there are about 315,000 tracker and variable rate mortgage holders, who will be severely impacted by rate hikes.

Yet with rate hikes flagged for years, why haven’t more people locked into fixed rates that are still available below 4% (see ccpc.ie).

I’m surprised there wasn’t more political heat over the decision to raise An Post’s savings rates so late and by so little. These savings products are the bastion of many pensioners’ incomes and decisions on how much to raise them are as significant for many elderly people as the pension itself. The NTMA, which sets these rates, seems to have ignored inflation (rampant at around 5%), the EU savings market and ECB hikes, and focused solely on its woeful competitors – Irish banks.

An Post has tucked itself in barely ahead of the best Irish bank rates (after tax) …cashing in on its key advantage of being tax-free.

In turn, Irish banks now have a low bar to aim for when they respond, no doubt with minimal interest rate increases – if any.

So competition in the €151bn deposit rate market has been scuppered by a State entity that missed a chance to put banks under more pressure.