Lagarde defends hawkish ECB as analysts warn of 'more rate hikes to come'

The decision will automatically cost Irish households on tracker mortgages, and households refinance at higher rates at the expiry of their fixed-rate home loans

Christine Lagarde insisted the ECB didn't see "any trade-off" between fighting inflation and nurturing financial stability. File photo: AP/Michael Probst

Christine Lagarde, the head of the European Central Bank, strongly defended the decision to plough ahead with a hefty interest rate hike despite the turmoil swirling around global banks, warning that inflation was set to stay "too high for too long".

The ECB unveiled a further half-point increase on Thursday even after the weekend collapse of a number of US banks, including Silicon Valley Bank, and amid the woes of European banking giant Credit Suisse which required emergency funding on Wednesday night to keep going. 

Some analysts had thought that the financial turmoil would give the ECB some room to pause, but Ms Lagarde appeared to double down, telling reporters in Frankfurt that "we have to do our job" to control inflation.

The decision will automatically cost Irish households paying tracker mortgages, and in time hit almost all households when they come to refinance at higher rates at the expiry of their fixed-rate home loans.        

Conall Mac Coille, chief economist at Davy, said that financial markets were unsure about the outlook for interest rates, but that the ECB has signalled there were more increases in the months ahead, as long as the current market turmoil subsides soon. 

Economist Austin Hughes said the ECB was indicating that it would drive ahead, "but not as aggressive as it had previously threatened" in its battle to rein in inflation.                  

Some banks and some technology businesses are struggling to cope ever since the ECB and the US Federal Reserve started to increase interest rates aggressively last year. 

'Resilient'

But Ms Lagarde told reporters in Frankfurt that European banks were "resilient" and in much better financial health than on the eve of the global financial crash in 2008. She insisted the ECB didn't see "any trade-off" between fighting inflation and nurturing financial stability.        

Asked whether the ECB would raise rates "until something breaks", she described Thursday's rate hike as a "robust" decision, adding the central bank had assessed that the business model of Silicon Valley Bank was different from that of European lenders.                                          

Ms Lagarde offered a crumb of comfort, saying the decision was based on the ECB assessing inflation data and growth forecasts at the start of March and before the onset of this week's banking disturbance.   

However, inflation, the bank's primary responsibility, is far higher than in previous crises and the ECB's new projections put price growth above its 2% target through 2025, an overriding concern for many ECB governors.

Inflation is seen averaging 5.3% this year, 2.9% in 2024 and 2.1% in 2025, the ECB said, but again emphasising that these projections were finalised before the current turmoil.

Ms Lagarde told the press conference the annual rate of inflation in the eurozone had fallen back to 8.5% in February, but that food prices had climbed 15%, as prior energy costs fed through to prices. 

Inflation across the services part of the eurozone economy also rose, partly driven by wage increases, she said, while firms were able to raise prices in areas facing high demand. 

Affect on mortgages

There are more than 700,000 residential home loans in the Republic, with around 250,000 on mortgage tracker rates, which are directly affected whenever the ECB hikes its official rates. 

Around 400,000 mortgage borrowers have fixed-rate mortgages, which means many households will face hefty increases in their repayments when the maturity on the loans expire. 

“Many of them will be exiting these fixed rates in the near future and will be coming out into a rising mortgage environment with no certainty around where rates are going to end up," said Rachel McGovern, director of financial services at Brokers Ireland, which represents 1,225 brokers. 

The latest half-point hike rate hike by the ECB "is the latest blow for borrowers", said Joey Sheahan, head of credit at Online Brokers, and will add a further €50 a month, or €600 in a full year, to mortgage bills. His estimates are based on a 30-year mortgage of €200,000.

"The move to fix or switch has accelerated since July 2022 and today will serve as the tipping point for those that have borne the rate increases to date but are now at the threshold of affordability," he said.