ECB expected to increase interest rates

MORE than four out of five homeowners will be exposed to the prospect of rising mortgage costs today as interest rates are expected to rise.

The European Central Bank (ECB) governing council meets today and are highly expected to increase interest rates from 1.25% to 1.5%. Such an hike would affect those on tracker mortgages and could also affected those on standard variable rates.

When the ECB last increased rates in April, some Irish banks chose not pass on the hike to SVR (standard variable rate) customers however they could decide to take a different approach today.

Director of the Irish Mortgage Corporation, Frank Conway said: “Tracker mortgage holders will all see their repayments increase. However, what is less certain is which banks will pass along the rate rise to their standard variable rate customers.”

This is the second time the ECB have raised interest rates this year and many analysts expect another hike before the year is out.

Kevin McNerney, Broker member of the Trusted Advisor Group believes that after today there will be at least one more increase before the end of 2011.

A rise in interest rates could affect more than 80% of Irish mortgage holders, whose mortgages are based on variable rate loans, this includes tracker mortgages and standard variable rate loans. If rates rise by a quarter of a percent, this will push up monthly repayments by €15 per €100,000 borrowed.

CEO of the Irish Brokers Association, Ciaran Phelan said that although we are still in a financial crisis the threat of higher inflation in the performing economies of Europe is likely to lead to an interest rate hike today of 0.25%.

“As this is an increase in the ECB rate, all tracker mortgages will be affected heaping more pressure on many struggling home owners,” he said.

Senior economic adviser with Ernst & Young, Marie Diron said she does not think that now is the time to raise rates.

“We think that now is not the time to raise rates. Data on economic activity in quarter two point to a clear slowdown compared to quarter one.

Mr Conway said he doesn’t see any escape from the ECB vigour to contain inflation.

“I also think that the ECB inflation hawks are in the ascendancy of Mario Draghi, a known inflation ‘hawk’ at the ECB,” he said.

Mr Draghi will take over from Jean Claude Trichet as head of the ECB later on this year.

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