Another half-point ECB rate hike likely, say Irish-based economists

Irish-based economists believe the European Central Bank (ECB) will opt for another aggressive half-point interest rate hike at next month’s policy-setting meeting, heaping further pressure on mortgage holders here.

It comes as markets are now fully pricing a percentage-point of policy tightening by the October meeting, which would take the deposit rate to 1 per cent, according to swaps tied to the decision date. That’s the first time traders are betting on an increase of that magnitude.

The ECB surprised investors last month with a 50-basis-point rate increase, fearing that inflation, now approaching double-digit territory, was at risk of becoming entrenched. With headline data pointing to a further increase in core inflation, another rate hike in September is seen as a done deal.

“We would agree with the market view, that a 0.5 per cent hike in September is fully priced in as a certainty because European HICP [Harmonised Index of Consumer Prices] inflation continues to surprise on the upside and the ECB has fallen behind the Fed and Bank of England in raising rates,” said Davy chief economist Conall MacCoille.

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Ger Brady of employers’ group Ibec said: “Any guess at this stage will be very uncertain but market expectations and some centre-ground members of the ECB governing board are certainly pointing to further front-loading of rate hikes in the coming months.

“The ECB has a single mandate of controlling inflation, so a lot depends on expectations of inflation which certainly aren’t easing and are unlikely to through the winter.”

What about mortgages?

Tracker mortgage holders with €200,000 remaining on their mortgage over 20 years could expect to pay €45 more a month in the event of a 0.5 per cent hike while first-time buyers borrowing €250,000 over 30 years at a variable rate of 2.78 per cent could expect to see an increase of €70 a month from a 0.5 per cent rate increase.

Economist Austin Hughes said he expected a 50 basis points [half a percentage point] hike in September and another 75 basis points split (bps) between October and December meetings. “There is a material risk of 100 bps rather than 75 bps before end-year,” he warned.

[ Another rate hike on the cards for September as ECB warns inflation outlook hasn’t improved ]

[ Irish mortgage rates edged lower in June ahead of ECB hike ]

[ Avant Money to raise mortgage rates after ECB rate hike ]

Inflation at about 9 per cent is frighteningly high for many at the ECB and the rate is above 20 per cent in the Baltic countries, said Mr Hughes.

“It is also likely to go higher later this year on elevated gas prices and some spillover into core inflation. The weakness of the euro against the dollar is a further source of upside price pressure,” he said.

Kiernan McQuinn of the Economic and Social Research Institute cited comments by European Central Bank (ECB) board member Isabel Schnabel, suggesting she favours another large interest rate increase next month even as recession risks harden.

In an interview last week, Ms Schnabel noted the euro-zone inflation outlook had failed to improve since the ECB’s July rate hike. Mr McQuinn said Ms Schnabel’s comments reflect concern that inflation is becoming more “broad-based” and that more aggressive action may be needed.

However, he noted that recent US data pointed to core inflation there moderating and “that maybe the euro area will follow suit. Interest rate hikes are very much on the cards for the rest of the year but it’s probably too early to say if it will be 0.25 per cent or 0.5 per cent.”

Speaking on The Irish Times business podcast, Aidan Donnelly, associate director at Davy Global Fund Management, said the ECB’s tools for fighting inflation “are absolutely no use against the inflation they have to fight”.

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Putting up interest rates would make no difference to energy prices or to the supply chain disruption affecting the global economy, he said.

Despite the aggressive rate tightening in the short term, money market activity suggests the ECB will subsequently slow the pace of rate increases into 2023, with traders seeing interest rates hitting 2 per cent only by September next year. — Additional reporting, Bloomberg