HOMEOWNERS ARE almost certain to face a hike in interest rates later this week following news that inflation has surged to a record 4 per cent within the euro zone.
Provisional data published by Eurostat yesterday shows that annual inflation rose to 4 per cent in June, up from 3.7 per cent in May - the highest level recorded since the EU began measuring inflation data for the euro currency in 1997. Sharp rises in food and oil prices over the past year are behind the surging inflation rate, which is expected to reinforce the European Central Bank's (ECB) determination to increase interest rates.
"It's clearly going to rattle the ECB further," said Gilles Moec, an economist at Bank of America who was predicting a marginally lower figure of 3.9 per cent for annual inflation.
"It certainly plays into the hands of the hawks on the ECB governing council." The ECB has an inflation target of just below 2 per cent and officials at the bank have given clear signals that it intends to increase its main interest rate by a quarter percentage point to 4.25 per cent at its governing board meeting on Thursday.
The ECB has issued repeated warnings that growing energy and food prices could lead to a "wage-price spiral".
Some analysts are predicting further successive interest rate hikes in coming months. Nick Kounis, a senior economist at Fortis, said the ECB would probably have to raise rates more than once to counteract the unexpected surge in inflation.
"We expect the widely expected July hike to be followed by further moves in Q4 of this year and in Q1 of next year, which would take the minimum bid rate up to 4.75 per cent," he said.
Any rise in eurozone interest rates increases the repayment costs for homeowners on variable rate mortgages, heaping further pressure on the Irish property market, which has already experienced a significant fall in value over the past 18 months.
Surging inflation is also increasing calls by trade unions for higher pay deals to cushion the effect of fast-rising energy and food prices, which are lowering the living standards of workers.
The European Commission warned yesterday against excessive wage claims by trade unions that would only boost inflation further. "What is important again," said a commission spokeswoman, "is to ensure that those inflationary expectations don't become entrenched and to avoid at all costs a wage-price spiral, which would have very damaging consequences for our economy and citizens in general."
Luxembourg prime minister and chairman of the Eurogroup (the finance ministers of all 15 eurozone countries) Jean-Claude Junker warned yesterday that the "inflation figures are making me very concerned". The fresh inflation figure comes just days after finance ministers from Germany, Spain and France warned the ECB not to take any measures that stifle the European economy.
"The ECB has to consider that they could possibly send the wrong signal with an interest rate increase because it could have a pro-cyclical impact at a point when the economy is slowing down," German finance minister Peer Steinbrueck told the weekly Der Spiegel.
