ECB raises interest rates by one quarter percent

The European Central Bank (ECB) today raised interest rates for the fifth time since December, by a quarter of a percent.

The latest house prices figures indicate that the interest rate hikes from the (ECB) this year are beginning to have an effect on price growth. Rates are now at their highest since early December 2002.

A week after the following figures from Permanent TSB and Sherry Fitzgerald were released, the ECB today increased rates for the fifth time, each by a quarter of a percent, since it started adjusting rates in December 2005, as Europe’s economy picks up.

The ECB benchmark refinancing rate is now at 3.25%, and the latest quarter of a percentage point rise means an extra €15 a month for home owners for every €1,000 borrowed.

The latest rise also means that in the last 10 months, homeowners have seen their mortgage repayments jump by €75 per month, for every €1,000 borrowed.

So are higher interest rates hitting house price growth? First of all the latest Permanent TSB/ESRI price index shows that house prices nationwide rose by 1% in August compared with July - the third month that the growth rate has slowed.

The annual rate of growth was 15.4%, the same as July, with the average price paid for a house in August €306,173.

Permanent TSB's Niall O'Grady said there was a clear trend of slowing price growth, and the figures pointed to the heat being taken out of the market.

House prices in Dublin and outside Dublin grew by 1% and 0.9% respectively in August, giving annual rates of 17.2% and 15.5%.

New house prices rose by 0.9%, existing houses by 1%. The annual growth rates were 14.9% and 12.9% respectively.

Separate industry figures suggest house price growth in the second hand market was just 2.6% in the three months between July and September, after soaring earlier this year.

Estate agent Sherry Fitzgerald said the cooler growth was even more obvious in Dublin, where growth was 1.5% in the quarter.

However, the nine-month growth figure nationwide, was 17.9%, while the Dublin figure was 23%.

The latest rate rise was widely expected after ECB President Jean-Claude Trichet upgraded the central bank's stance on inflation risks to "strong vigilance" at the last meeting.

Many economists forecast that rates will hit 3.5%, by the end of the year as the economic picture improves, with eurozone inflation falling to 1.8% in September - below the ECB's preferred rate of just under 2%.

Other evidence of a recovery are figures which show that the French economy grew 1.1% in the second quarter, its strongest growth in 20 years, while German output expanded 0.9%, the best performance in five years.