ECB between 'rock and hard place' to get it right on rate hikes as bank crisis deepens

The banking contagion which has spread from the US to Europe was caused by the huge increases in official interest rates

Christine Lagarde, president of the European Central Bank: Any comments on the bank crisis on Thursday will be followed closely.

The European Central Bank is caught "between a rock and a hard place" as it prepares to reveal at lunchtime on Thursday whether to sanction a hefty half-point increase in interest rates that will pile on the financial pain for households and businesses, experts say. 

The dilemma comes because the central bank had signalled that a further hefty rate increase was on the cards as it fights stubbornly high levels of inflation across Europe. But that was before the world banking markets were rocked last weekend by the collapse of Silicon Valley Bank and other banks in the US.

The banking contagion which has spread to Europe was caused by the huge increases in official interest rates since the US Federal Reserve and the European Central Bank started hiking last year.

Financial markets now bet that the US central bank will slow the pace in its rate increases, but that has left the European Central Bank between "a rock and a hard place" because inflation pressures are seen as more deep-seated in Europe than in the US, said Michael Dowling, a leading mortgage broker in Ireland.   

At the same time, central bankers will be very worried should further large rate hikes make the banking crisis worse because they cannot fully know "what is under the bonnet" in potential problems hidden in the balance sheets of European banks, Mr Dowling said.   

Paradoxically, the central bank will also have to weigh up the potential for markets to be spooked further even if it were to deliver a smaller rate increase of a quarter point, or none.

The comments by European Central Bank president Christine Lagarde at the press conference following the announcement of the rate decision on the banking crisis will be followed very closely on Thursday.                    

An interest rate hike would be its sixth increase since last year and would likely cost Irish mortgage tracker customers around €77 extra per month. The estimates are based on a mortgage loan of €300,000 over 25 years

The European Central Bank has increased interest rates by a total of 3.5% since last summer which has led to the monthly costs of tracker mortgage customers jumping by €539 in their repayments, said Stephen Hamilton, managing director at broker MortgageLine.

First-time buyers looking to get a foot on the property ladder have had to pay up to €500 extra per month on a mortgage of €300,000, Mr Hamilton said.

“With rising house prices and more rate increases on the horizon this is making it extremely difficult for homebuyers,” he said. 

'Stuck in limbo'

Mr Hamilton said that people searching for homes were effectively being stuck in limbo, where many people are attempting to avoid high levels of rents but are finding it “harder and harder” to get a home of their own.

There are more than 700,000 residential mortgages in Ireland and around 200,000 of these are tracker customers which are the most exposed to the interest rate hikes enforced by the European Central Bank. 

Central Bank data from earlier this year showed fixed-rate mortgages now constitute the majority of new agreements.