ECB raises interest rates by 0.25% marking tenth straight hike as ...

The ECB's deposit rate now lies at 4%, taking it to an all-time-high, with its marginal lending rate at 4.75%.

Today's meeting of ECB officials in Frankfurt has been the most uncertain since rate hikes began last year, with reports that even participants of the meeting had no inkling of what the final outcome would be.

"Inflation continues to decline but is still expected to remain too high for too long," said the ECB.

"In order to reinforce progress towards its target, the Governing Council today decided to raise the three key ECB interest rates by 25 basis points."

At the start of September, experts widely believed that the ECB would hold rates steady to keep economic growth intact, with markets reflecting just 20% odds of a hike.

However, with the ECB now expecting inflation to stay well above its target next year, analysts say it has been made increasingly difficult for the central bank to not act.

Stubborn inflation

The announcement follows a recent spike in Irish inflation, which rose to 6.3% annually last month, up from 5.8% in July. Currently, eurozone inflation remains at 5.3%, with the ECB expecting price levels to remain above 3% throughout 2024.

"The September ECB staff macroeconomic projections for the euro area see average inflation at 5.6% in 2023, 3.2% in 2024 and 2.1% in 2025," the regulator said. 

"This is an upward revision for 2023 and 2024 and a downward revision for 2025," with the ECB noting the revision reflects a higher path for energy prices.

Several ECB officials recently said rates will have to stay at high levels for an extended period to counteract sticky inflation, with the regulator targeting an inflation rate of 2% over the medium term.

Tracker mortgages

With an additional 0.25% hike set to quickly trickle down to the Irish economy, Michael Dowling, Managing Director of mortgage broker, Dowling Financial warned all those on tracker mortgages will see their rates rise within one month, bringing the average tracker rate to 5.65%.

"From July last year to this month, mortgage repayments have increased by €280 per month or €3,360 over the year," Mr Dowling wrote in the Irish Examiner.

While Irish banks have not fully passed on rate increases to variable and fixed-rate customers, mortgage holders have seen rates rise by an average of 2%, with Irish rates still marginally surpassing the eurozone average. 

The average mortgage for new customers is now at €300,000 with these customers seeing an increase of €320 a month or €3,840 in a year.

"We have 72,000 mortgage customers coming off fixed rates by year-end and they will all face similar increases in their monthly repayments," Mr Dowling warned.

Currently, There are about 315,000 tracker and variable rate mortgage holders, and 400,000 plus mortgage borrowers on fixed rates, of which over six in ten are fixed for less than three years.

Meanwhile, Central Bank of Ireland figures show the volume of new mortgage agreements increased by 14% compared to June to €870m, a decline of 4% in annual terms.

At the same time, figures from the Central Bank for the first quarter of 2023 also show those in arrears from 0-90 days have increased by 3,639 compared to the same period last year.

'Too far too fast'

Following the decision, Brokers Ireland called the outcome "very disappointing," adding that the ECB "should at least have paused its aggressive interest rate stance until we have a better measure of the impact of the previous nine hikes."

“Experts tell us it takes 18 months and longer for the effects of rate increases to become apparent," said Rachel McGovern, Director of Financial Services at Brokers Ireland.

“This ECB policy is in our view going too far too fast and will put a great deal more pressure on mortgage holders, on businesses and is also likely to negatively impact the wider economy, including housing.”