All eyes on ECB as homeowners face mortgage costs increase

HOMEOWNERS could be hit with increased mortgage costs today when the European Central Bank (ECB) announces if there will be any changes to interest rates.

It is widely expected that the ECB will increase rates by 0.25%, which will mean a €45 increase in mortgage repayments on a €300,000 mortgage. This will affect tracker and standard variable mortgage holders.

If the ECB hikes rates it will be the first increase since July 2008.

If, as also expected the ECB hikes rates by a full 1% over the next 12 months, this would result in mortgage repayment increasing by €180 per month per €300,000 or over €2,160 per year.

This news comes as around 80,000 people are now struggling to pay their mortgage.

Director of the Irish Mortgage Corporation Frank Conway said a hike in interest rates will result in an immediate rise in the number of homeowners falling into arrears on their repayments.

ECB president Jean- Claude Trichet said last month that the bank’s record low rate of 1% might be raised amid concern that inflation now at 2.6% could spiral out of control. Although most economists expect the ECB to raise its benchmark interest rate by 0.25% today, some are not ruling out a 0.50% hike as a signal to markets that the ECB is serious about fighting inflation.

Berenberg Bank chief economist Holger Schmieding said: “We expect this to be the start of a series of ECB rate hikes, probably one 25 basis points move per quarter.”

Yesterday, a top analyst said an increase in ECB interest rates and a resulting stronger euro are the “last thing that Greece, Ireland or Portugal needs”.

Andrew Balls, the head of European portfolio management at Pacific Investment Management said: “The ECB does need to make policy for the eurozone as a whole, but perhaps it should consider combining a rate-hiking cycle for the core with greater realism in terms of the approach for the weakest peripheral countries.”

“Perhaps the best thing that could happen would be acknowledgment that Greece, Ireland and Portugal face significant solvency challenges, and some or all of them will need to restructure their sovereign and sovereign- guaranteed debt,” he added.

Strategist Mislav Matejka at JP Morgan expects eurozone rates to rise steadily by 25 basis points a quarter in 2011 from the current level of 1%.

Bank of Ireland, chief economist Dan McLaughlin said the rise of the euro is due to expected interest rate rises in Europe and no immediate rises in the US.

“The implication is that a rally in the dollar against the euro is unlikely unless US interest rate expectations change, and these in turn are most likely to be affected by the trend in US employment — the pick-up in the pace of job creation may well prompt the market to bring forward the expected timing of a US rate rise.

“We suspect this will indeed occur, and as such expect a near-term pull- back for the euro/ dollar rate,” said Dr McLaughlin.