Q&A: What does the ECB's interest rate rise mean for Irish mortgage holders?

While two banks say they intend to absorb this first ECB rate rise, families are preparing for a further financial shock on top of 40-year-high inflation. Stock picture

News that  the European Central Bank (ECB) has raised its baseline interest rate by 0.50% — its first such move in more than a decade, but likely not the last this year  — was expected.

Nevertheless, it will likely have left a lot of people, businesses, and governments across the EU feeling very jittery indeed.

But why has this happened? And how will it affect ordinary people, and what comes next?

Why has the ECB done this?

In a word, inflation. Cost of living pressures were already coming to a head before Vladimir Putin took the fateful decision to invade Ukraine on February 24. Inflation  —  broadly speaking, the rate of increase in prices across society — has far outstripped the roughly 4% the Government had predicted prior to the war in Ukraine, with prices rising by just under 10% in June, its highest level in 40 years.

How does raising rates help?

How central banks respond to inflationary pressures is generally to raise interest rates in order to take the heat out of the situation. That is, if things are more expensive, people will spend less and the economy cools.

Generally speaking, this will see businesses and wholesalers across society likewise raise their prices to maintain their profit margin. Which means consumers end up paying more. 

That’s fine if they can afford to. But if wage increases don’t match inflation, things can get very dicey very quickly for those close  to the poverty line. 

So it affects everything?

Pretty much yes, given that wholesalers will generally increase their prices in line with the hike in what the banks are charging them. Consumer goods prices have risen at a rate of knots so far this year, as has the cost of fuel, although the latter is predominantly driven by what’s going on in Ukraine and Russian brinksmanship with regard to its gas supply  —  on which mainland Europe is heavily reliant.

What can the Government do?

Concerted pressure told recently, when the Government agreed to bring Budget 2023 forward by two weeks amid constant calls from the Opposition for prompt action regarding the cost of living. That budget will focus almost entirely on the increase of prices across Irish society, with targeted measures like further energy credits and welfare bonuses expected. However, the extra €6.7bn being made available is unlikely to cushion the impact entirely across society. It’s likely to be a lean winter for many.

How about homeownership?

This is one of the biggest problems in an Irish context. We already have the highest mortgage rates in Europe (a legacy of the enormous bank bailout following the 2008 crash), and lenders across the EU will generally follow the ECB’s lead, especially in terms of the roughly 250,000 Irish households on tracker mortgages, which are tied directly to the overall ECB rate, and therefore automatically increased in cost following today’s hike.

Are the banks following suit?

So far, trackers aside, they appear to be keeping their powder dry. Permanent TSB was the first out of the blocks to say they wouldn’t be raising rates, with Bank of Ireland also stating that its products are “unaffected”. AIB, more obliquely, said it continues “to keep our rates under review”. 

Still, if possible, it might be a good time to move your mortgage to a locked-in fixed rate with the idea of outlasting the current inflationary crisis.