ECB is deliberately vague on next rate hike

AIB rate increase to be followed by other main banks

With increased mortgage interest rates to impact more and more current and potential homeowners, the European Central Bank's Chief Economist said the body was being purposefully vague on how far interest rates will have to rise to ensure inflation returns to the 2% goal.

Philip Lane, the former Governor of the Central Bank of Ireland said their decision on how much they will hike rates further at this month's meeting of the ECB will be dictated by the latest data on inflation. The ECB has already hiked rates in July and September by 0.5 and 0.75 basis points respectively.

On Friday, AIB became the first of Ireland's three main banks to raise interest rates by adding 0.5% to its fixed-rate mortgage products. It is expected that Bank of Ireland and Permanent TSB will follow in the coming days with similar increases on some of its mortgage products. Many of Ireland's non-bank mortgage lenders have already put in place rate increases.

The increased rates will put further pressure on applicants seeking to purchase a home. Some first-time buyers are already failing mortgage stress tests experts have said as lenders examine their incomes against future potential mortgage repayment rates. Increased repayments will also further reduce disposable income, already being reduced by soaring energy bills and rising food and transportation costs.

And the current increases are unlikely to be isolated. The ECB has set out a clear path of planned rate increases. Following the two previous rate increases, the ECB will make a further increase at their next meeting on October 27 and again on December 15.

Philip Lane: “We’re not trying to be overly precise about where that target level, where this terminal level is because it’s going to move with the data inflow."

It is likely that further increases will take place in 2023 as the ECB works to bring inflation down from its current record level of 10%. There has been much speculation and comment on what the next increase will be. However, Mr Lane said the ECB is being purposefully vague on how far rates will have to rise to ensure inflation returns to the 2% goal.

Policymakers agreed at their last session in September that rate hikes will be needed at the next several meetings, Lane said on the sidelines of the annual meetings of the International Monetary Fund in Washington Saturday. 

“We’re not trying to be overly precise about where that target level, where this terminal level is because it’s going to move with the data inflow,” he said. “So rather than saying here’s our number and that’s it, we were trying to signal wherever that takes us is what we are going to do.” 

Traders are betting on an increase of 75 basis points at the next meeting and see rates climbing to 3% eventually. Lane refused to comment on where he expects rates to settle.

More hawkish officials have used their time in Washington to argue for another significant move after the inflation rate unexpectedly climbed to 10% in September - five times the ECB’s target. Some are also pushing to start discussions on reducing the €8.8tr balance sheet.

“In September, we said we do think we need interest-rate hikes over next several meetings before we get to the level needed for inflation to return to 2% in a timely manner,” Lane said. 

“We have a good understanding of how interest rates affect the economy, how interest rates affect the price dynamic.” While “it’s clear we’ve moved away from a situation where the maximum increment is 25,” he added, “we still have to work on our optimum speed.”

• Additional reporting Bloomberg