Banks set to move rapidly to pass on ECB rate hike

Irish banks will in a short order pass on the latest interest rate hike from the European Central Bank to all mortgage customers, further squeezing households during the cost-of-living crisis, experts say.

The European Central Bank yesterday delivered a jumbo hike of three-quarters of a point, in official rates, which means it has hiked key rates by a total of 2% since it first took up the fight in the summer against the worst inflation crisis since the 1970s.

Market observers predict the central bank will hike rates again when it next meets in December, by half-a-point, after ECB president Christine Lagarde speaking in Frankfurt repeatedly said more hikes were on the way. She had refused to give guidance on when rates would reach their peak, saying the latest hefty rate increase was a significant move but insisting that the bank was “not done yet”.

Markets are betting that the ECB will only have stopped raising rates by early next summer, but by then Irish households will likely be paying €450 more a month on a €300,000 mortgage.

There was no escape for the more than 275,000 Irish households who hold tracker loans who automatically see their loan costs rise hand-in-hand with ECB increases.

Yesterday’s rate increase triggers another increase of €120 a month for a household paying a tracker loan of €300,000 and means a total rise of €315 a month for the tracker customer since the ECB started out on its inflation-fighting cycle.

A significant share of the 730,000 mortgaged households in the Republic have so far escaped rate increases because some mortgage lenders have not followed through in hiking their variable or fixed-rate loan rates.

AIB last week increased its fixed rates and leading 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 costly variable rates may escape some of the full cost of the ECB hikes, however, he said.

Lenders for reasons to do with the financial crash and more recent banking scandals have delayed passing on the ECB rate rises, Mr Dowling said.

Rachel McGovern at industry group Brokers Ireland said that uncertainty over future rate increases will weigh on the housing market. “The real worry now is the unknown one of how long increases will go on for and what level they will reach,” she said.

Neil McDonnell, chief executive at business group Isme, said the spotlight will fall on the amounts that Irish households and small firms pay for their loans because Irish lenders continue to charge rates that are significantly above rates in most other parts of the eurozone. “Regardless of what the ECB does, Irish rates will be higher,” he said.

Kieran McQuinn, research professor at the Economic and Social Research Institute, said SMEs in Ireland have relied less on debt borrowings since the financial crash — but further interest rate hikes will hit firms struggling since the onset of the pandemic, particularly in retail and tourism.

Mr Dowling said the best fixed-rates for mortgages that are usually taken up by first-time buyers range from between 2.5% to 3%, depending on the number of years the cost of loan will be fixed at those rates. He cited a mortgage at 90% of loan to value fixed for three years from Avant; 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 3% rate from Bank of Ireland fixed for five years.

Joshua Mahony at online broker IG said that the ECB “appears steadfast” in but will weigh the valuation of the euro and the prospects for a eurozone recession in deciding on future rate increases.

“The ECB failed to follow their Canadian and Australian counterparts in easing back on the pace of their tightening phase, with the bank raising rates by another 75-basis points today,” Mr Hahony said. “With the ECB having previously taken time to act, they appear willing to continue raising rates in a bid to reach the levels seen elsewhere around the world.