Uncertainty for Irish mortgage households as ECB ponders when to start cutting interest rates

Some ECB officials caution against sanctioning rate cuts but others have made more dovish predictions

Some 70,000 fixed-rate mortgages of a total 430,000 Irish households on fixed-rate home loans will face refinancing at sharply higher rates this year.

Financial planning for Irish household mortgage holders and for businesses has got a lot more uncertain as European Central Bank hawks push back against the prospects for early cuts in interest rates, mortgage brokers and analysts have said. 

Despite eurozone inflation having plunged from a record 10.6% in late 2022 to 2.8% last month and expected to fall towards the ECB's 2% goal this year, ECB officials have signalled out core inflation pressures and potential wage-driven inflation, in particular, for their caution against sanctioning rate cuts. However, other ECB officials have made more dovish predictions. 

'No consensus'

“It’s becoming obvious that there’s no consensus anymore for the high-for-longer policy,” said Karsten Junius, chief economist at Bank J. Safra Sarasin in Zurich.  

Leading Irish mortgage broker Michael Dowling said that he believes that most of the 179,000 holders of tracker mortgages in Ireland, despite being among the first and worst hit by the significant ECB rate increases since the summer of 2022, have nonetheless absorbed the hikes. 

"As far as can I see, there hasn't been a rush to switch by tracker holders," Mr Dowling said. "I could count on one hand the number of customers who have come off their tracker mortgages."   

He said the flexibility for many tracker customers of being able to make part payments without paying penalties and the expectations that interest rates wouldn't stay too high for too long has outweighed the financial hit from the rate increases. With no new tracker mortgages having been sold for some time, the average outstanding balance on a tracker home loan stands at €133,000, which means the household monthly payment has risen by a total of €280 a month since the middle of 2022, Mr Dowling estimates.  

Meanwhile, 70,000 fixed-rate mortgages of a total 430,000 Irish households on fixed-rate home loans will face refinancing at sharply higher rates this year. They face refinancing loans at fixed rates as high as 4% to 4.5% when their current loans on rates as low as 2.5% expire. 

"I am advising clients to either go fixed again or to go variable and see where the fixed rates end up, because we know that the fixed rates are going to fall from this summer. It might be worth your while to go variable for the moment rather than fixing in for another three or five years when there may be cheaper fixed rates becoming available in time," Mr Dowling said. 

When to cut?

While almost all ECB officials endorse cutting official interest rates this year, they differ over when to fire the starting gun. A majority appears to favour June or later, though several are leaning toward April and one refuses to rule out March.

The divergence highlights the range of views over the trajectory for inflation and the path for the eurozone's lacklustre economy, with uncertainty on loosening by the US Federal Reserve and the Bank of England complicating matters too. How the discussion plays out in Frankfurt will help to shape how quickly and by how much rates are cut. 

Countering more hawkish colleagues, ECB member and Bank of France governor Francois Villeroy de Galhau said last week there were several compelling reasons why the ECB should not hold off for too long on an initial interest rate cut this year. 

• Additional reporting Bloomberg