Warning for Irish mortgages and firms over 'higher for longer' ECB interest rate hikes

Fears the European Central Bank will be forced to hike interest rates higher for longer will hit Irish firms and mortgaged households, experts have warned.

It comes as markets bet that the ECB will only stop hiking rates next February, much later than once thought, after the publication on Tuesday of stronger-than-expected inflation readings in France and Spain. 

Financial markets extended their bets and predicted the ECB would only stop hiking its official rates at a peak of 4% early next year. Irish experts said that official rates, at or above 4%, would mean significant hardship for households and firms.

Just three weeks ago, traders expected the central bank to stop raising rates by the middle of this year, at 3.5%. Official ECB interest rates at 4% "will create significant problems" for the 275,000 households on tracker mortgages", said Michael Dowling, a leading mortgage broker and debt adviser. 

"A potential 4% rise increase in tracker rates in just over 12 months is significant," Mr Dowling said. Economist Jim Power said that the problem for the ECB was that inflation was proving to be "stickier than central banks had expected".                  

Despite falls in wholesale energy prices, employment levels were still at strong levels and consumer price pressures were spilling into the prices for consumer services, which "all adds up to a situation where the central bankers are very nervous," Mr Power said. 

Concerns that interest rates would go higher for longer crept into eurozone bond and stock markets, with the implied cost of government borrowings increasing.  The yield or interest rate for Germany to borrow for 10 years rose to 2.64%, while Ireland's 10-year bond traded at 3.12%. 

“Market concerns over a slowdown in US inflation spread to Europe today, with Spain and France both seeing an unwelcome push higher on their headline CPI (consumer price) readings," said Joshua Mahony at online broker IG. 

"As perverse as it may seem, we now find ourselves in a position where markets would likely welcome signs of economic weakness which could hasten the decline in inflation,” he said.

The European economy remains more resilient than expected despite a series of outsized hikes that have raised borrowing costs by 3% since July. Focus now turns to eurozone inflation data due on Thursday, where any signs that price pressures are broad-based and entrenched risk fuelling bets on even more aggressive action.

“Markets have not fully priced in the peak,” said Piet Christiansen, chief strategist at Danske Bank. “It can push higher, in particular the May meeting pricing, which is still ‘only’ pricing a coin toss probability between 25 basis points and 50 basis points,” he said. 

ECB policy makers have been sounding the alarm, warning the market is too complacent about the outlook and underestimating the bank’s resolve to bring inflation back to its 2% target. ECB chief economist Philip Lane said the central bank might hold borrowing costs at a high level for some time once they reach their peak.