ECB interest rates - Stamp duty uncertainty is a big concern

THE European Central Bank (ECB) raised its interest rate by 0.25% yesterday for the eighth time in the past 18 months.

This brings the key interest rate to 4%, which is the highest level in almost six years.

The increase was signalled at the ECB meeting in Dublin last month, so it was no surprise. Jean-Claude Trichet, president of the ECB, explained that the bank’s policy is to ensure stable inflation in order to promote sustained economic growth, and thus job creation. The banks and building societies will pass on the rate increase to borrowers and savers.

First-time buyers will be paying about €15 extra a month for every €100,000 borrowed. This will cost them about €300 a month extra in the provinces, or €415 a month more in Dublin than they were paying 18 months ago. The increases should help to dampen inflation in this country.

At 5%, however, inflation in Ireland is still running significantly ahead of the rest of the European Union.

Our inflation is also running ahead of European Central Bank interest rates at 4%. This has its own inflationary pressures.

Before joining the European Monetary Union, the Central Bank in Dublin would have raised interest rates in order to dampen house price speculation and thus control inflation within our own borders.

But the ECB regulates with a view to the economy of the broader union — not just its component parts.

By introducing the series of interest rate increases in a slow, measured way, the ECB has retained the confidence of the financial sector.

It has also managed to maintain price stability on the Continent. This should provide for better sustainability of jobs.

Even though the interest rate is still lower than our inflation rate, there are already indications of a distinct slowdown within the housing market.

In its latest quarterly figures, the Irish Bankers Federation noted that there was a 19% fall in the number of mortgages provided by financial institutions in the first quarter of this year, compared with the same period last year.

The number of people moving house dropped by 25%, and investor mortgages dropped by almost 22%. Much of the drop has been attributed to uncertainty in relation to stamp duty.

This has had implications for the Government, as the tax take was down on the projected figure for the first time in five years.

Much of the political debate during the recent general election campaign revolved around the issues of stability or insecurity in the economy.

There could be little doubt that the economy was the biggest issue with voters.

The stamp duty issue has engendered a considerable amount of uncertainty in the housing sector. With the tax take down and spending up by 22.7%, the new government will have to tackle this issue as a top priority in order to remove the uncertainty.