Further suffering for the housing sector

THE expected hike in ECB interest rates next month will damage the housing market further as higher borrowing costs will prevent thousands of potential buyers entering the market.

The hike threat comes as Finance Minister Brian Lenihan warned yesterday the economy was facing very demanding circumstances.

“We’re in the middle of a huge credit squeeze. There is a shortage of credit and that is a serious problem,” he told journalists at a meeting of the European Construction Industry Federation in Dublin.

On the ECB rate hike speculation he said: “I have to follow the practice of European finance ministers. The ECB make these decisions themselves. The bank has not made its position definitive,” he said.

Economist Brian Devine of NCB said he believed the hike in rates would be the last for some time.

Economic growth and money supply are not as strong as the ECB thinks they are, and that will eliminate the need for another rate hike when the situation becomes clearer, he said.

If the bank had not already signalled its intention to raise rates after the last meeting, the ECB could have pulled back from a rate hike next month, he added.

The main purpose of the July increase will be to underpin the bank’s own credibility.

Irish economists believe, however, that the force of the comment more or less makes a rate hike a virtual certainty.

ECB executive board member, Lorenzo Bini Smaghi, writing in a column for the Financial Times said the central bank would have to raise interest rates unless the eurozone services sector improved its productivity to counter higher commodity prices.

At the same time, German producer price inflation rose at a much faster than expected pace in May to its highest level since July, fanned by surging energy costs, he said.

Ron Simpson, director of FX research at Action Economics in Florida said: “With the ECB forever concerned about inflation and the inflation data out of Europe coming in stronger than expected, that’s going to keep the focus on rate hike expectations in the eurozone.”

“ECB council members have been very clear that we are not expecting a series of rates hikes, but on the other hand, it’s to be dependent on incoming data. If we keep seeing numbers like this, at some point the market will begin to price in more than one rate hike by the bank,” he said.