Interest rates set to hit 3.75%

THE European Central Bank (ECB) is expected to raise interest rates for the seventh time in just over a year at its monthly meeting today.

That will put pressure on mortgage holders who will have to spend an extra €45 per month in repayments on a typical €300,000 loan.

Interest rates have climbed steadily from December 2005, when the ECB began its tightening of the base rate from 2%, to stand at 3.5%.

Today’s hike will push rates to a four-year high of 3.75% and there may be more pain to come with most economists expecting one more hike before the summer and more to come next year.

The ECB are concerned that the rebound in Europe’s economy will push inflation, its sole consideration when setting interest rates, higher and derail the recovery.

The good news is that inflation in the eurozone is below its target of 2% and may stay there for some time.

“We still expect the ECB to take rates to 4% by the middle of the year and come to a rest there, though the risks are to the upside,” said Klaus Baader, chief European economist at Merrill Lynch.

For those looking to offset the expected hike, mortgage-holders have the options of fixing or switching to another financial institution.

“We are seeing much greater numbers of homeowners fixing rates and also switching to better rates in an effort to cut expenditure where possible,” said Suzanne McGuinness, marketing manager of IFG mortgages.