A momentous gathering of the European Central Bank tomorrow will set the scene for the first of a set of interest rate hikes this summer that will add to the financial headache for as many as 740,000 Irish households already battling soaring inflation.
The ECB at the Frankfurt meeting is expected to roll back much of its huge bond-buying supports and pave the way to the first of two summer rate hikes, in July and September, moves that will likely add significantly to the costs of Irish mortgage borrowers.
Financial markets were until recent days betting that the ECB gathering that includes Central Bank of Ireland head Gabriel Makhlouf, would likely sanction two successive official rate hikes of a quarter-point each through September that would be passed on to many Irish households by their mortgage banks.
However, raging energy and food prices driven by the Ukraine war may now force the ECB to hike interest rates even faster, according to traders.
Leading mortgage brokers said any official interest rate hikes by the ECB will likely mean that 460,000 home loan borrowers on variable and tracker rates of the 740,000 residential mortgage borrowers in the Republic would immediately face increased costs in servicing their home loans.
Almost all 740,000 borrowers will in time pay more, as the remaining borrowers on short-term fixed mortgage rates revert to new and higher borrowing costs.
Senior broker Michael Dowling said that two ECB rate hikes over the summer leading to a total of a half a point rise in mortgage rates would add €80 a month, or €960 for a full year, to the cost of households servicing a mortgage. The estimate is based on a mortgage loan of €300,000.
The concern would be that the expectation is that any summer rate increases would only be the start and could amount to rate hikes of 1.5% to 2.5% over the next 30 months, Mr Dowling said. “There are more increases to follow. That is the real pinch point for borrowers,” he said.
Variable and tracker mortgage holders haven’t experienced a rate increase for many years and “while the first rate increases might be absorbed by many households, any successive increases will hurt hard”, the broker said.
Mr Dowling said that a cumulative rise of 1% in mortgage rates would add almost €2,000 in a full year for the €300,000 home loan. Brokers reiterated advice for borrowers to seek out long-term fixed rates well beyond the typical three-year terms taken out by many borrowers.
Brendan Burgess, founder of the askaboutmoney website, said the advice is for people to fix for the long-term because in the past economists and bankers have been very poor in their forecasts for interest rates.
In theory, because Irish mortgage rates are already among the highest in the eurozone, it was now more important than ever for households to consider what rival lenders are offering in long-term fixed rates of up to seven years, Mr Burgess said.
He said there was, in particular, a large group of borrowers who are on expensive variable rates who could tap significant savings.
Meanwhile, money markets ramped up their bets on ECB interest rate rises on Wednesday to price in 75 basis points of hikes, or rises of three-quarters of a point, by September.
With the bank largely expected to start rises in July and move in quarter-point increments, the pricing implies traders now expect its hikes to include a rare half-point move at a single meeting by September, brought forward from the October timing anticipated last week.
Traders have steadily ramped up their bets on ECB hikes following a higher-than-expected eurozone inflation report last week, which boosted the case for larger moves from the central bank. A number of ECB policymakers have said they are open to a half-point move.
“It seemed inevitable to me that 50-basis-point hike bets would become more popular given that the ECB is widely perceived as being behind the curve and other central banks have started to move in 50-basis-point increments as well,” said Antoine Bouvet at ING, referring to the Reserve Bank of Australia.
The US Federal Reserve and the Bank of England had already started earlier this year to hike their rates aggressively to counter inflation. The Australian central bank raised interest rates by a half-point earlier this week in a hawkish surprise.
“Clearly the April meeting was a puzzling one for markets with rhetoric failing to match market expectations and I suspect the same might be true at this meeting,” the analyst said.
Government bond yields had dropped sharply following the ECB’s April meeting when it refrained from making firm pledges regarding stimulus removal beyond what it had outlined in March. Bond yields continued to rise on Wednesday.
Germany’s 10-year yield, the benchmark for the eurozone, rose to a new high since 2014 at over 1.35% and was up on the day.
It extended its rise after data showed the eurozone economy grew much faster in the first quarter of the year than in the previous three months despite the impact of the war in Ukraine. The Irish 10-yield bond yield was also up sharply to trade at 1.94%.
Italy’s 10-year yield was up to 3.45%, but below the highest since 2018 at 3.55% earlier this week. The closely watched risk premium on 10-year Italian debt over Germany’s was at over 2.1%, though down from earlier this week.