Irish mortgage holders are being warned to brace for a “tough winter” with markets pricing in two more interest rate hikes between now and Christmas.
With inflation across the euro zone now running at over 3 per cent, the European Central Bank (ECB) is expected to announce another quarter point lift in rates when it meets on Thursday.
But with the US-Iran war continuing to exert upward pressure on energy prices, the prospect of a further rate hike before Christmas is now seen as likely.
“With little prospect of the Middle East conflict being resolved and other pressures such as that on the bond market, we could be facing a tough winter for mortgage holders,” Rachel McGovern, deputy chief executive of Brokers Ireland, said.
McGovern was speaking as the latest Central Bank data showed the weighted average interest rate on new mortgage agreements in the Republic fell marginally to 3.48 per cent in July and was down 12 basis points annually.
By contrast, the euro area average has increased by 24 basis points over the past year. The upward pressure on rate is however is expected to play out here in the coming months.
ECB must be ready to raise interest rates further, argues Gabriel Makhlouf
“While the average cost of new mortgages has fallen, given the expectation of another ECB rate increase tomorrow, borrowers need to be mindful that increased mortgage costs could be just around the corner,” Trevor Grant, chairperson of Irish Mortgage Advisors, said.
“Many borrowers will understandably be worried about the prospect of another ECB rate hike tomorrow – the second increase in the space of three months, but it’s important that they are not unduly alarmed,” he said.
“Competition and not the ECB is the main influence on home loan rates in Ireland,” he added.
The Central Bank figures indicated that 94 per cent of the new mortgage lending agreements in July had fixed interest rates, the highest proportion on record, reflecting the need for security against an uncertain financial backdrop.
Fixed-rate products are the norm across Europe.
Frankfurt is widely expected to tighten its policy while reiterating its data-dependent stance as the Iran war drags on when policymakers meet on Thursday.
The ECB became the first central bank in the G7 to respond to the Iran war in June when it raised borrowing costs by a quarter point to 2.25 per cent, and it is widely anticipated to lift borrowing costs by a further 25 basis points to 2.5 per cent on September 10th.
“The decision we’re going to make next week will not be a surprise to anybody,” the governor of the Central Bank of Ireland Gabriel Makhlouf said last week, adding that he expected the ECB would also “slightly” raise its growth forecast for the euro zone this year.