Fears of interest rate hike remain

THE ECB’s intention not to raise interest rates in June from the present 1.25% rate may be just a temporary respite.

The bank raised its key rate by 0.25% last month having held rates at record lows of 1% for nearly two years as the eurozone economy stalled.

ECB president Jean-Claude Trichet, speaking to the media in Helsinki after the rates were left unchanged yesterday, warned that the bank stands ready to raise rates if inflation continues to pose a serious threat to the stability of the region.

Markets expect rates will be increased shortly and have not ruled out a further quarter point hike in July.

The key difficulty for the ECB is the rate of inflation currently standing at 2.8%. It is mandated to keep the rate at or below 2% under EU guidelines.

Rachel Doyle, director of PIBA Mortgage Services, said that while mortgage holders may be relieved by yesterday’s decision “the indications are that there could be at least two further quarter percent increases before the end of the year.”

She warned there was “no guarantee” that borrowers will not be hit by rate increases anyway if lenders decide to increase rates to boost their own margins, even if the ECB rate is not going up at present.

She advised now was the time for mortgage holders on variable rates to consider fixing for periods of five years or longer “before it becomes too late.”

“Mortgage holders who took advice to fix for longer terms of five years or more are now likely to see their decision bear fruit over the next couple of years, she said. “Fixed rates for those wishing to change now are already on the way up, with some lenders even having suspended fixed rates. However, there are still some options open to those wishing to fix,” she said.

Since Ireland entered recession later than the rest of Europe, coupled with the fact that we are experiencing a much deeper banking crisis than most other countries, she said ECB increases would have “a disproportionate effect on Irish mortgage holders”.

Lynsey Clemenger, economist with Ulster Bank Capital Markets said that while the ECB never pre-commits, yesterday’s guidance suggests “the next increase looks set to take place in July at the earliest, and not in June as we had previously expected.”