Irish small exporters 'anxious' over British inflation and mortgage rate hikes

UK inflation at 8.7% has beaten estimates for four months running and still remains well above the Bank of England's 2% target.

Soaring interest rates designed to target stubbornly high levels of inflation in Britain pose a rising threat to the many small firms exporting across the Irish Sea, a leading economist has said.

Conall Mac Coille, chief economist at Davy, said that the Bank of England is fighting against the highest inflation rate in the G7 economies, while British wage growth is adding to price pressures.

Irish exporters, and in particular small indigenous firms who disproportionately rely on the British market, will be closely watching the potential economic fallout on consumer demand in Britain "with some anxiety", Mr Mac Coille said.

It comes as financial markets bet the Bank of England will be forced to hike British interest rates higher than once thought — possibly to their highest level in a quarter century — as traders questioned officials’ ability to tame inflation without hobbling the UK economy.

Money markets are fully pricing a 6.5% official British interest rate by February and attribute a one-in-three chance of an even higher 6.75% peak. That would be the highest since 1998 and compares with wagers on a 5% peak just a couple of months ago.

The cost of borrowing for the British government has also climbed.

The interest rate, or yield, on the 10-year bond climbed to 4.7%, the highest since 2008, and compares with the equivalent 10-year bond for Ireland that trades at the much lower cost of 3%.

Pushing official borrowing costs to such levels would drive borrowing costs for British mortgages and businesses deeper into the pain zone.

A return to mortgage rates of around 6% for the first time since 2007 guarantees a renewed slump in mortgage lending and a further leg down in house prices, Capital Markets said in a commentary last month.

The consultancy said on Thursday that the many holders of long-term fixed-rate mortgages and households who had paid off their mortgages would cushion many households from the fallout of rate hikes.

"The most vulnerable group is relatively small, which may partly explain why the Bank of England is having to raise interest rates by more than anyone thought likely a year ago," it said.

Inflation in the eurozone has also persisted at higher levels than once thought, but is running below British levels.

Financial markets are still betting that the European Central Bank will hike interest rates by a quarter point later this month and by a further quarter point after the summer, but that official rates will peak at lower levels than those in Britain.

British policymakers have delivered 13 successive rate increases since late 2021, including an unexpected half-point hike last month, yet UK inflation at 8.7% has beaten estimates for four months running and still remains well above the Bank of England's 2% target.

At one point on Thursday, markets fully priced another half-point hike in August.

Irish Examiner. Additional reporting Bloomberg