Fixed mortgage rates urged

HOMEOWNERS have been urged to fix their mortgage interest rates now by one of the country’s leading economists.

Niall Dunne, economist with Ulster Bank, says it is likely interest rates will rise in the second half of this year or early in 2006 in response to rising inflation in Europe.

In Ulster Bank’s latest report, Mr Dunne said now was the ideal time for mortgage holders to fix their repayment as it was inevitable that they will rise from “record and unsustainable lows in the months ahead.”

“The eurozone’s money supply has been accelerating on average at 6.6% over the past three months, far above the ECB’s stated tolerance of 4.5% annual growth.

“The inflation targeting ECB is nervously watching for second-round inflation effects arising from increased liquidity, and would undoubtedly hike rates if data releases improved even fractionally,” he said.

Mr Dunne also downplayed the possibility of a rate cut - as was hinted at by the European Central Bank last week.

“Recent comments from ECB President Jean- Claude Trichet have caused markets to reassess the probability of a rate cut in the months ahead.

“However, if a cut is made, then surely the market will grow more optimistic on the eurozone’s future growth prospects.

“So a cut in short-term rates could soon lead to higher long-term rates, if a cut boosts economic growth,” he said.

The economist also said there is just a “1% probability” of the ending of the single currency over the next decade.

“However, if the market’s perception of the bloc’s perceived stability has suffered as a result of these events, then the cost of long-term debt in the eurozone will likely rise,” Mr Dunne said.

He added: “A series of unprecedented events have combined to drive long- term fixed rates to historic lows in recent months.

“Borrowers can now fix variable rate debt at levels cheaper than the average historic floating rates.”

However, figures from the ECB yesterday indicated that interest rates will remain on hold for some time as eurozone money supply growth has hit an 18-month high

ECB data showed M3 money supply, a measure of the amount of cash in bank accounts and other liquid short-term investments, grew at a 7.3% annual rate in May versus an upwardly revised 6.8% in April.

The ECB has said M3 growth faster than 4.5% risks fuelling inflation down the line. Economists said the strong M3 growth by low interest rates is keeping down the cost of borrowing and uncertainty on equity markets is increasing investors’ preference for cash holdings.