ECB expected to raise interest rates again

Markets predict a 25 basis point increase in response to high inflation

The ECB will conclude its monetary policy meeting on Thursday. 

The European Central Bank (ECB) is widely expected to increase interest rates again on Thursday when it concludes its meeting, as inflation remains high, with energy prices continuing to rise.

The ECB began monetary policy discussions on Wednesday in Berlin, with markets widely expecting interest rates to be increased by 25 basis points. This will lead to a rise in mortgage rates for Irish customers when the increase filters its way through the system.

The latest flash estimate from Eurostat shows inflation — as measured by the harmonised index of consumer prices — shows eurozone annual inflation was running at 3.3% in August, up from 2.9%. Energy prices are expected to be the primary driver, increasing 14.3% compared to the same period last year — up from 10.3% in July.

The ECB’s target is for inflation to run at 2% over the medium term.

Energy prices in July experienced a dip following a ceasefire between the US and Iran in their conflict, however, after hostilities resumed, prices experienced another surge across the later part of July and August.

The cost of Brent crude oil — a global benchmark of oil prices — has surged again, reaching over $100 (€85.92) a barrel on Wednesday. Prior to the war in late February, a barrel was trading at about $72.

According to the Dutch TTF, natural gas was trading at €75.84 per megawatt hour (mWh) which has surged in the last month. In early August, it was trading below €55 per mWh and before the war it was around €31.47.

This rising prices will feed their way through the system and eventually cause electricity prices to rise.

With the interest rate expected to be announced by the ECB, chief executive of online mortgage broker Doddl Martina Hennessy said this would “directly impact tracker mortgage holders initially and could impact variable rate customers”.

“So far this year, only non-bank lenders have increased their rates, while the main lenders have yet to move and it may be later this year or into next year before they do.” 

“The message for borrowers is not to be passive. You will only ever know if it makes sense to switch by doing your research or getting market-based advice from a broker. If you can save then I would encourage people to act as there is no benefit to pay needless interest.” 

While the interest rate on Thursday tomorrow is widely expected, markets are also pricing in more interest rate increases over the coming months.

Roman Ziruk of global financial services firm Ebury said as it stands markets “are currently pricing in another hike in December, with an additional one seen coming in March”.

“We think that this is too aggressive. The ECB's chief economist Philip Lane has pointed to 2.5% as the upper bound of the ECB's neutral-rate estimate, so any tightening beyond this month would tip policy into restrictive territory,” he said.

"We instead expect September to be the last hike in this unusually short, two-step cycle. Of course, much still depends on how the Iran war evolves. A protracted stalemate or further flare-up in hostilities that triggers another meaningful spike in energy prices, or sizable second-round effects, could well embolden the hawks on the Governing Council to push for more."