Homeowners are likely to face rising mortgage costs just ahead of Christmas after the European Central Bank (ECB) signalled its intention to raise interest rates next month.
The ECB president Jean-Claude Trichet has held open the prospect of further rate rises in 2007.
The central bank's governing council yesterday held rates steady at 3.25 per cent but after the meeting, a hawkish Mr Trichet confirmed previous guidance that interest rates would climb by a quarter percentage point when the bank meets on December 7th.
Such a move would be the sixth quarter point increase in rates since December last year, the most recent in October. Each quarter point increase in the ECB's base rates adds roughly €20 to €50 to the monthly repayment on typical mortgages.
Homeowners with a mortgage of €250,000 over 25 years have seen their repayments increase from €1,199 last December to €1,368 following last month's rate hike, based on the typical tracker mortgage rates available to first-time buyers.
If the ECB, as expected, increases its base rate to 3.5 per cent next month, the repayment on such a mortgage will jump to €1,404 - more than €200 a month more than what these borrowers were paying a year earlier.
The rise in interest rates will erode consumer confidence, according to Ian Burns, business development partner at professional services group RSM Robson Rhodes. "The Irish are relatively heavy borrowers. The confidence to borrow more keeps fuelling spending."
Mr Trichet said after yesterday's meeting: "Strong vigilance remains of the essence so as to ensure that medium to longer-term inflation expectations in the euro area remain solidly anchored at levels consistent with price stability."
"Vigilance" is the word Mr Trichet has consistently used to signal an imminent rise in interest rates.
NCB economist Eunan King said last night: "A rate increase in December is certain and, despite some evidence of caution about the longer-term outlook and Trichet's unwillingness to give any signal on policy in 2007 at this stage, it seems likely there will be further tightening next year."
While most analysts are pencilling in a quarter point increase next month, the hawkish tone of Mr Trichet's comment led a small number to suggest the ECB could even sanction a half percentage point increase then.
They pointed to Mr Trichet's more hardline tone compared to previous statements.
He said rates were still low and added: "If our assumptions . . . continue to be confirmed, it will remain warranted to further withdraw monetary accommodation. Indeed, acting in a firm and timely manner remains essential to ensuring price stability over the medium term."
Explaining the ECB view that inflation was likely to resume an upward course as oil prices rose again, he said: "The governing council will therefore exercise strong vigilance."
However, Mr King last night suggested rates would not rise to 3.75 per cent until the first quarter of 2007.
He held out the prospect of a change of emphasis as a slowing US economy holds back growth in the euro zone as the year progresses.
Rising interest rates are likely to intensify competition in the mortgage market.
Last month, National Irish Bank launched a mortgage product with margins as low as 0.5 points above the ECB rate, meaning established homeowners whose loans equal less than 80 per cent of the value of their property can get a mortgage with an interest rate of 3.75-3.84 per cent rather than the typical first-time buyer tracker rate of 4.35 per cent.