Michael Dowling: Irish banks to benefit from ECB rate hike

Irish mainstream banks will benefit more than their European counterparts by higher interest rates as net interest income accounts for 80% of Irish retail banks' income, compared to 54% in Europe.

Permanent TSB has indicated that it may absorb the first and possibly the second round of ECB interest rate increases. Picture: Sasko Lazarov/RollingNews.ie

The ECB will announce its first interest rate hikes in over a decade this week. It has provided plenty of guidance as to what will be announced.

Interest rates are set to rise by a minimum of 0.25%, or a maximum of 0.5%.

The ECB has said that rates will rise by 0.75% by September and, more worryingly, if the effect of the increases does not address the issues, rates could increase further.

The expectation from the markets is that rate increases could be as high as 2.5% in the current cycle of increases from July to December 2024.

These increases will have an unwelcome impact on many households who are already struggling with substantial increases in utility and transport bills. Inflation is around 9% currently, and prices are rising at their fastest pace in nearly 40 years.

The most telling aspect of the announcement will be the reaction of the mainstream banks.

Interestingly, Permanent TSB has indicated that it may absorb the first and possibly the second round of increases.

I am not sure how this will be possible for tracker-rate customers whose interest rate is directly linked to movements in the ECB base rate.

I would suggest that they are talking about their variable-rate customers who, in the case of Permanent TSB and Bank of Ireland, are charged the dearest variable rates on the market today of 4% to 4.5%.

Irish mainstream banks will benefit from higher interest rates more than their European counterparts as net interest income accounts for 80% of Irish retail banks' income, compared to 54% in Europe.

The value of AIB shares has risen 25% this year, and Bank of Ireland shares have risen 37% as they have a larger UK loan book, where base rates have increased from 0% to 1.25% in the last seven months.

Three UK banks have increased interest rates already. In fact, one lender has increased rates twice in the last two months.

We have seen fixed-interest rate increases ranging from 0.2% to 1.2%. However, longer-term fixed rates, 15 to 30 years, have fallen with one lender.

European Central Bank president Christine Lagarde Picture: Alex Kraus/Bloomberg

Let us consider the impact of the 1.35% rate rise, suggested by the ECB. Taking a mortgage of €300,000 over a 30-year term, monthly mortgage repayments will rise by €220, which is very significant.

I would urge all variable-rate mortgage customers to switch to long-term fixed rates now. Those who are on short-term fixed rates of two to five years will find that the cost of breaking their current rate is zero in many cases.

You have an opportunity to switch to longer-term fixed rates that will provide security on the biggest monthly bill you have and, more importantly, give you peace of mind.

I would remind these customers that you can make part payments of 10% of the loan balance, each year during the long-term fixed rate, without penalty.

Michael Dowling is the managing director of mortgage broker Dowling Financial