European Central Bank expected to hike rates 'by further 1.25%' before year-end

ECB president Christine Lagarde indicated it was necessary to deliver a larger-than-expected hike than signalled because inflation pressures, including energy and food price rises, had intensified across the eurozone. 

Around 300,000 households on tracker mortgages face a hike in their home loan costs that will immediately add €1,000 to the annual cost of servicing their home loans, and face even higher costs by the end of the year, experts have predicted. 

It comes after the European Central Bank hiked its official rates by a hefty half a point as the central bank fights inflation that has flared since Russia invaded Ukraine on February 24.  "Price pressures are spreading across more and more sectors," ECB president Christine Lagarde told reporters in Frankfurt.

Leading Irish mortgage brokers predicted that mortgage costs will rise for many of the 730,000 mortgaged households in the Republic even though some banks deferred passing on the additional costs for their variable rate mortgage customers for the time being. The 300,000 households on tracker mortgages automatically have their rates hiked in tandem with ECB rate increases, while people on fixed-rate mortgages that expire later this year will almost certainly face higher costs too.                                

Stephen Fagan, head of euro money markets at Bank of Ireland, said that the ECB is expected to increase rates by a further 125 basis points, or 1.25%, by the end of the year "but this could change depending on whether Russia shuts down gas pipelines in the weeks ahead". 

At the press conference, Ms Lagarde indicated it was necessary to deliver a larger-than-expected hike than signalled because inflation pressures, including energy and food price rises, had intensified across the eurozone. 

"We expect inflation to remain undesirably high for some time," she said, citing food prices and the depreciation of the euro against the dollar among other items contributing to inflation pressures. 

The euro has fallen about 10% against the dollar this year, heightening price pressures because global oil is traded in dollars, economists have pointed out.     

Ms Lagarde described the eurozone economy as facing a drag on growth from the Ukraine war[/url and increased uncertainty.  On the other hand, she pointed to the easing of supply bottlenecks, the recovery of tourism, savings built up during the pandemic, and a growing levels of employment as helping to support the economy. 

She said that households across the eurozone were in some degree benefiting from measures by governments to ease the costs of energy bills. 

Weighing the risks, Ms Lagarde said a prolonged war and disruption of energy supplies from Russia, as well as economic uncertainty and the future course of energy and food prices could keep inflation elevated for longer and impact on growth.          

Ms Lagarde told reporters said that the unanimous decision by the governing council to hike rates by a hefty half a point was based on the "upside risk to inflation". 

For Ireland, businesses and households face higher borrowing costs for the first time in over a decade.      

Neil McDonnell, chief executive of business group Isme, said he hoped the banks here wouldn't pass on the ECB hike, adding lenders had the "headroom" to absorb some or all of the half-point increase. "But the message for our members is that there is more to come because the interest rate cycle is not over," Mr McDonnell said. 

And businesses face the threat of even higher Irish energy prices should Russia turn off or down the gas supplies to continental Europe this winter, he said.