Banks should act quickly to pass on ECB rate hike

Irish banks will quickly pass on the European Central Bank’s latest interest rate hike to all mortgage customers, further weighing on households during the cost of living crisis, experts say.

The European Central Bank carried out a massive three-quarter point hike in official rates yesterday, meaning it has hiked policy rates by a total of 2% since it began battling the worst crisis this summer. inflation since the 1970s.

Market watchers predict the central bank will raise rates again at its next meeting in December by half a point after ECB President Christine Lagarde, speaking in Frankfurt, told several times that other increases were underway. She had declined to give any guidance on when rates would peak, saying the latest big rate hike was a big move but insisting the bank was “not done yet”.

Markets are betting the ECB won’t stop raising rates until early next summer, but by then Irish households will likely be paying €450 more a month for a €300,000 mortgage .

There was no escape for the more than 275,000 Irish households holding tracker loans who are automatically seeing their borrowing costs rise alongside ECB increases.

Yesterday’s rate hike triggers a further increase of €120 per month for a household paying a tracker loan of €300,000 and means a total increase of €315 per month for the tracker client since the ECB began its cycle of fighting inflation.

A significant portion of the Republic’s 730,000 mortgage households have so far escaped rate hikes because some mortgage lenders failed to follow through on their variable- or fixed-rate loan rate hikes.

AIB last week raised its fixed rates and industry expert Michael Dowling predicted that all lenders would pass on Thursday’s increase “very, very soon” to all their variable and fixed rate customers. Customers paying expensive variable rates could escape some of the full cost of ECB hikes, however, he said.

Lenders, for reasons related to the financial crash and more recent banking scandals, delayed the transmission of ECB rate hikes, Dowling said.

Rachel McGovern of industry group Brokers Ireland said uncertainty over future rate hikes will weigh on the housing market. “The real worry now is the unknown how long the increases will last and how high they will go,” she said.

Neil McDonnell, chief executive of the Isme group of companies, said the spotlight will be on how much Irish households and small businesses are paying for their loans, as Irish lenders continue to charge rates significantly higher than those in most other parts of the euro area. “Regardless of what the ECB does, Irish rates will be higher,” he said.

Kieran McQuinn, a research professor at the Institute for Economic and Social Research, said Irish SMEs have been relying less on borrowing since the financial crash – but further interest rate hikes will hit struggling businesses since then. the onset of the pandemic, particularly in retail and tourism.

Mr Dowling said the best fixed rates for mortgages that are typically taken out by first-time buyers range between 2.5% and 3%, depending on how many years the cost of the loan will be fixed at those rates. . He cited a mortgage at 90% of the loan at fixed value for three years from Prior; a four-year fixed rate loan from Permanent TSB at 2.35%; a five-year fixed rate comparative conventional loan from AIB at 3.05%; and a rate of 3% from the Bank of Ireland fixed for five years.

Joshua Mahony of online broker IG said the ECB “seems unwavering” but will assess the valuation of the euro and the prospects of a eurozone recession to decide on future rate hikes.

“The ECB has not followed its Canadian and Australian counterparts in slowing the pace of their tightening phase, with the bank raising rates an additional 75 basis points today,” Hahony said. “As the ECB has previously been slow to act, it seems willing to continue raising rates in a bid to reach levels seen elsewhere in the world.

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