Mortgage holders and business hit by ECB rate rise

THE average homeowner will have to fork out an extra week’s wages to cover soaring mortgage costs after the European Central Bank (ECB) increased rates by another 0.25%.

The rise brings interest rates to a seven-year high of 4.25%, though there are indications this will be the only hike this year.

A typical mortgage holder with a 30-year, €300,000 variable rate mortgage will now pay €1,656 each month — an increase of €46 a month. The annual increase is €550 — just more than the average weekly industrial wage.

IIB Bank chief economist Austin Hughes said the latest ECB rate rise is a further blow to Irish consumer and business confidence.

“Clearly this interest rate increase will harm a fragile Irish economy. Although the mechanical impact of a quarter per cent hit to the monthly budgets of households with borrowings is not to be underestimated, the more significant impact is likely to be on consumer and business confidence.”

Mr Hughes said, although there was a clear intention from the ECB to calm market fears, there was no commitment that rates will not rise again.

However, ECB president Jean-Claude Trichet did signal yesterday that he may not increase interest rates again. He said the fundamentals of Europe’s economy “are sound” and focused on inflation, which he said could remain high “for a more protracted period than previously thought.”

He did not indicate when rates might go up again — as he did at last month’s meeting. Many analysts took his comments to mean no further increases this year.

Labour deputy leader and spokesperson on finance Joan Burton said many families are faced with the very real prospect of living with negative equity. “Further increases in interest rates will put more downward pressure on house prices and postpone further the prospect of normalisation in the property sector.”

Meanwhile, Taoiseach Brian Cowen has urged people to stop talking as if the economy is facing Armageddon. He said the fundamentals of the economy are far stronger than in previous decades and what is needed is calm consideration of what action should be taken.

Minister for Finance Brian Lenihan is announcing the Government’s plan of action to deal with the economic crisis next week.