Mortgage holders to ‘face five rate hikes’

MORTGAGE holders could see their repayments soar by the end of next year — Citi Bank is expecting five interest rate increases from the European Central Bank (ECB) between now and then.

If the ECB hikes rates from the current level of 1.25% to an expected 2.5% this would mean an extra monthly repayment of €225 on a €300,000 mortgage.

Citi economists expect the next interest rate hike in July and a further one before the end of the year.

In its latest Global Economic Outlook and Strategy, Citi Bank also said that it believes the chance of debt restructuring is high in Ireland, Greece and Portugal. For Spain, it believes risks of fiscal slippage over time are greater than markets currently price in.

It said the EMU sovereign credit crisis is “unlikely to fade quickly”.

“With stronger-than-expected GDP growth in quarter one and upward revisions of our GDP forecast for the core countries, we are more optimistic on euro area GDP growth for 2011 and 2012.

“However, growth divergence in the euro area is likely to stay high in coming years and the sovereign debt crisis is far from over. However, we expect the ECB to go ahead with the next rate hike in July and to increase rates to 2.25% by mid next year,” Citi economists said.

The bank said the ECB will probably will use “strong vigilance” language at the upcoming June policy meeting to signal that a rate hike is likely at the July meeting.

Citi does not expect the ECB to continue to hike rates rapidly or far beyond that. It said that the ECB’s decision to start hiking before banks in the US and Britain does not imply the euro area has a bigger inflation threat.

“The ECB appears to believe that the long period of low policy rates in 2003 to 2006 helped fuel the credit boom.”

Globally they expect strong growth this year and next, with global GDP rising 3.5 to 4% each year, well above the long-run average of just below 3% year on year.

They said that the slowdown in China is likely to prove mild and, in terms of GDP growth, quarter two is likely to prove the weakest quarter.

“But growth remains uneven and many economies will not be growing particularly strongly this year and in 2012,” they said.