ECB rate: More pain for mortgage-holders with 0.75 percentage point hike

Borrowing costs for many mortgage holders are set to rise again after the European Central Bank (ECB) increased its main lending rate by three-quarters of a percentage point on Thursday.

The latest announcement means that interest rates have now jumped from zero to 2 per cent since July.

Unlike the September announcement, no ECB policymaker openly opposed the 75 basis-point hike, suggesting there is now real concern that the historic surge in inflation is becoming more entrenched in the economy.

The increase comes as homeowners in the State are already under financial strain from surging energy costs and rising prices generally. Headline inflation in the Irish economy is currently running at 8.2 per cent.

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“Inflation remains far too high and will stay above the target for an extended period,” the ECB said in a statement. “The Governing Council took today’s decision, and expects to raise interest rates further, to ensure the timely return of inflation to its 2 per cent medium-term inflation target,” it said.

While ECB president Christine Lagarde is likely to provide only vague guidance about future moves at the post-meeting press conference on Thursday afternoon, markets are already pricing in another 0.5 percentage point rise in December and a further one in the new year, bringing the ECB’s main lending rate to 3 per cent.

[ Explainer: What will the ECB rate hike mean for your mortgage? ]

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The latest increase means that someone on a tracker mortgage who has €200,000 remaining on their loan will now be paying around €180 extra each month compared to the start of the year, which equates to an additional €2,160 over 12 months.

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If rates reach 3 per cent next year, monthly repayments could rise by close to €300 a month or €3,600 a year.

“For now all the main banks have held off on increasing their variable rates. And only AIB has increased its fixed rates (by just 0.50 per cent). But that’s unlikely to last,” Daragh Cassidy of price comparison website Bonkers.ie said.

“However variable rates in particular in Ireland are poorly priced so there is scope for the banks to absorb some of the ECB rate increases for these customers. But Permanent TSB, Bank of Ireland and AIB are almost guaranteed to increase their fixed rates over the coming weeks.”

Bank of Ireland said on Thursday that aside from the automatic increase to its ECB tracker rates as a result of the central bank hike, the lender has made no decision in relation to other products. “The bank continues to keep all rates under ongoing review, and will clearly communicate any future rate change decisions at the appropriate time,” it said.

A spokeswoman for Permanent TSB and spokesman for AIB said that they are keeping their rates, aside from trackers, under review.

The ECB also announced changes to the terms on more than €2 trillion of ultra-cheap pandemic-era loans to banks known as TLTROs. The agreements had become problematic after the recent rapid rate hikes allowed lenders to park TLTRO cash in ECB accounts and earn a risk-free income.