US rate hike sets scene for ECB meeting at lunchtime tomorrow

Bank of Ireland hiked its fixed-rate mortgage loans ahead of ECB meeting

Eyes turn to the incoming ECB rate decision due lunchtime tomorrow. Picture: Michael Probst/PA

The Federal Reserve raised rates by a further quarter point tonight, even as US inflation has fallen sharply, and kept markets guessing whether it will soon stop a hiking campaign to rein in inflation.      

The decision by the US central bank sets the scene for the meeting of the European Central Bank (ECB) tomorrow, as the debate also rages in Europe about whether enough has already been done without running the risk of inadvertently sparking recession and sending households into debt. US inflation is significantly lower than that of the eurozone. 

In his remarks, US Federal Reserve chair Jerome Powell was hawkish, and the Fed could still raise rates in consecutive meetings if warranted. 

All eyes turn to the ECB meeting, but there is little optimism president Christine Lagarde will signal that it is minded to announce it will stop raising rates, despite the eurozone economy being much more fragile than in the US. Financial markets widely expect the ECB to announce a further quarter point increase, signalling much more pain for mortgaged households. 

The ECB decision at the following meeting in September is more in doubt. 

Mortgage hikes 

Meanwhile, Bank of Ireland hiked its fixed-rate mortgage loans a quarter point, but its rates are still the most competitive compared with AIB and Permanent TSB, leading broker Michael Dowling said. 

Its regular rate fixed for five years without a cashback offer rises to 4.25%, while teh same loan but with a cashback option increases to 4.75%. 

The rate increases will add €45 a month to the cost of repayments for an average first-time buyer with a loan of €300,000, Mr Dowling said. 

Many analysts believe it will be a long time before the ECB starts to cut rates, even it were to call a halt to more hikes for the eurozone, a cycle it started exactly a year ago. 

"Even if the region falls into a mild recession, it will be some time before policymakers are confident that core inflation will fall to 2% on a sustained basis," said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics in a commentary. 

As a result, we don’t expect to see the ECB cut interest rates until the second half of 2024 at the earliest.

Global central banks will base their rate decisions on the course of inflation. The International Monetary Fund said this week inflation was coming down and acute stress in the banking sector had receded. 

Capital Economics projects core inflation, which is the measure most looked at by central banks including the ECB, for interest rate decisions. The economists said global inflation rates have eased reflecting lower energy prices  "but we think that lower core inflation will do more of the heavy lifting in getting overall inflation back to central bank targets in the years ahead". 

Tightening financial conditions are now as severe as during the financial crisis of a over a decade ago, but "the second stage, by which tighter financial conditions lead to weaker economic activity, has only just begun", Capital Economics said.