In a further blow to household budgets, the ECB has raised rates for the second time in a row.
The European Central Bank (ECB) has increased interest rates by the biggest margin in its history.
It has hiked its main lending rate by a record 0.75% to 1.25%.
The ECB had kept rates at a record low of 0% from 2016 until July of this year, when it hiked rates by 0.50% for the first time in 11 years.
However with inflation at record levels throughout Europe, the central bank has felt compelled to increase rates further. With more hikes almost a certainty before the end of the year.
The ECB's deposit rate, which it charges banks for keeping excess money on deposit with it, also increased by 0.75% to 0.75%, bringing it further out of negative territory. This means banks will no longer be hit with costs for keeping money with the ECB.
What will the impact be?
As with the last rate hike in July, those with tracker mortgages are likely to see an almost immediate increase in their monthly repayments.
However it remains to be seen if the main banks will pass on the rate increase to their variable-rate customers and new fixed-rate customers.
Last time AIB, BOI and PTSB spared these customers from the ECB's first rate hike - but will they be so lucky this time? There have been suggestions that the main banks will hold off on increasing rates until at least after the Budget.
As well as affecting mortgage rates, the latest increase is likely to put upward pressure on the cost of loans, overdrafts and credit cards in the medium term.
Those already on a fixed rate won’t see any change to their repayments though. At least for now. However if you’re on a fixed rate you'll likely to be faced with higher rate options when you come to the end of your fixed-rate period.
How much extra will I be paying?
How much extra you'll pay depends on the size of your mortgage, how many years you have remaining, and the interest rate you're currently paying.
But let's say you’ve €200,000 left on your tracker mortgage over 15 or 20 years, you’re looking at paying around an extra €65 to €70 a month.
However this is on top of the €45 to €50 you're paying as a result of the last rate hike, meaning your repayments will now be over €100 more compared to the start of the year.
|€200,000||10 years||15 years||20 years|
|**Based on someone paying a margin of 1%|
*Based on someone currently paying a margin of 1%
Why is the ECB increasing rates?
The ECB is trying to rein in record inflation, which is running at almost FIVE times its target, by cooling the economy.
However the ECB, like all central banks, is in a bit of a bind. Rapidly rising energy prices, due largely to the war in Ukraine, and continued supply chain bottlenecks due to Covid, are behind much of the recent uptick in inflation. However these problems won’t be solved by raising interest rates.
Indeed many argue that record energy prices, which have added thousands of euro to people’s heating, lighting, and transport costs throughout Europe, are already acting as a drag on growth and cooling the economy anyway, and that an increase in rates is just adding further misery to consumers’ finances when they can least afford it.
For example, energy bills have gone up by over €2,000 a year in Ireland in recent months, which is the equivalent of an interest rate hike of about 2% already.
Either way, the ECB has a delicate balancing act in trying to tame inflation over the coming months without inducing a prolonged recession. Unlike other central banks, it also has to weigh up the economic situation in 19 different nations.
We expect to raise interest rates further, because inflation remains far too high and is likely to stay above our target for an extended period.
ECB chief, Christine Lagarde
Have other central banks increased rates?
Yes. By a wide margin. In fact the ECB is still behind the curve when it comes to raising rates.
The US, UK, Canadian, Swiss, Australian and New Zealand central banks have all raised rates significantly over the past few months. And according to most experts, the ECB will have raised rate to around 3% by this time next year.
Here’s a look at how rates currently compare in the world’s main economies.
Tough time for households
Today’s news comes on the back of skyhigh inflation in Ireland.
Food inflation is running at close to 9%, according to the CSO, while people’s energy bills have increased by around €2,200 a year in recent months.
And now some households will have to contend with higher mortgage repayments.
In better news, people with savings are likely to see slightly better returns over the coming months. While the increase in rates is likely to cool property price growth.
Households with a variable-rate mortgage should look at switching into a longer-term fixed rate. Usually you don’t even need to switch mortgage provider to do this. You can just ring your existing provider and tell them you want to move onto a fixed rate. Fixed rates of up to 30 years are now available with some lenders, often at rates which are more competitive than variable rates.
So you’re getting peace of mind, better value and certainty that your repayments won’t increase. A real win-win.
Those on trackers may be better off staying on them – for now at least. But it’s important you do the math and get good advice. Depending on how high rates go, the margin you're paying, and how long you have remaining on your mortgage, it may make sense to leave your tracker and lock into a fixed rate.