Should we be worried about our finances?

Possibly… as prices soar, shares slump and an interest rate hike waits in the wings

Struggling households were dealt another blow this week as prices rose even faster than previously feared. Irish inflation soared to 5.7% as higher energy and food costs hit home – while Eurozone inflation soared to 5%. All this tests the European Central Bank’s resolve to keep interest rates steady (rate hikes being the main tool for fighting inflation).

And further rises in the cost of living are expected – piling on pressure for interest rates to go up. And as if all this wasn’t bad enough, investment markets tumbled this week on the worsening outlook for business.

But what does all this mean for our finances? When will interest rates rise? And what should we do about it?

‘I think both the Fed and Bank of England will raise [interest] rates two or three times this year but I don’t see the European Central Bank moving, certainly not before the fourth quarter of 2022,’ said economist Alan McQuaid.

Fellow number cruncher Dan McLoughlin agreed with this. However, both men also warned that if inflation keeps going up faster than anticipated, this could provoke the ECB to unleash its key inflation busting weapon – rate hikes – sooner than expected.

‘For years now the cost of a mortgage in Ireland has been historically low, both for new and existing borrowers, but that may be about to change, with the prospect of a first increase in a decade,’ said Mr McLoughlin.

However, Mr McLoughlin added the hike ‘is by no means certain, and a return to the rates seen in the noughties is highly unlikely’.

How big an effect would a rate rise have? Much less than it would have in previous years due to a massive shift towards fixed-rate loans, he said.

‘The impact will be far less pronounced than a decade ago because, at that time, virtually all existing mortgages were on a variable rate but that is now down to just over 50%, reflecting a massive shift in recent years to fixed rates for new loans,’ Mr McLoughlin said.

‘Moreover, about a third of existing mortgages are on a tracker rate, currently averaging just 1.05%, and that is also unlikely to change soon, given the configuration of ECB rates.’

The ECB’s fairly soft interest rate policy may be good for keeping a lid on our mortgage payments but not so good for prices, which are rising fast, adding thousands to our annual bills.

Low interest rates here compared with elsewhere will mean a weak euro relative to other currencies.

And that will further stoke up prices.

‘The rate outlook for the US, UK and Eurozone in 2022 points to the euro weakening against both the dollar and sterling in the first part of the year at least,’ said Mr McQuaid.

So what should we do?

With interest rates at record lows but about to rise, fixing your mortgage seems like a no-brainer for starters.

In fact, the cheapest mortgage deals are all fixed rates, said Mark Coan, founder of financial advisers Moneysherpa.ie

The best 24 mortgage deals on the market right now are all fixed rate, with an APRC (Annual Percent Rate Charge) of less than the nearest variable, he said.

If you have a loan-to-value rate of 50% or less, you can get rates as low as 1.95% with the likes of Avant Money.

The best mortgage deal of all, according to Moneysherpa.ie, is Avant Money’s 15-year fixed rate for loans worth less than 60% of the property value at 2.29%. The best variable rate for the same loan ratio is almost a quarter of a percent higher at 2.53% with ICS.

So what about our investments? Shares and pension investments have done extremely well in recent years. And European shares – less threatened by interest rate hikes – are seen as a better bet than US, UK or global equities.

European stocks were not as badly hit as elsewhere in this week’s rout and are a good place to shelter from the higher rates-fuelled global