The European Central Bank (ECB) yesterday raised interest rates for the first time in five years. Irish banks and building societies were tight-lipped about how and when they will pass on the quarter of a percentage point increase.
The increase will see typical mortgage rates here rise to about 3.35 per cent. Repayments on a €250,000 mortgage taken out over a 25-year period will rise by €33 per month to €1,232.
The ECB president, Jean-Claude Trichet, said yesterday that further rate increases next year were not inevitable. He said the bank was indicating its readiness to raise interest rates to combat inflation in the euro zone and it hoped this would this would give other policy makers, such as government and trade unions, the incentive to work towards low inflation.
"Our decision will contribute to keeping medium and long-term inflationary expectations anchored at levels consistent with inflationary expectations," Mr Trichet said.
Yesterday's rate increase, which was flagged by Mr Trichet last month, came in the face of opposition from euro zone governments.
On Tuesday a meeting of euro zone finance ministers called on the ECB to keep rates unchanged, arguing that rate rises threatened economic recovery in the euro zone. But Mr Trichet said that the governing council - which includes John Hurley the governor of the Central Bank of Ireland - had been unanimous in arriving at its decision.
It followed the publication of inflation figures for the euro zone indicating that inflation was running at 2.4 per cent compared with the ECB's target rate of 2 per cent.
However, none of the Republic's 11 lenders have yet decided whether they intend passing on the increase to their standard variable rate customers. Many lenders have already increased the rates at which they offer to fix mortgage repayments in anticipation of yesterday's increase.
Permanent TSB said it was monitoring the situation while the Bank of Ireland said it would discuss the ECB's move in due course. The EBS said it would be reviewing its rates over the next few days.
Some mortgages, known as tracker mortgages, follow the ECB rate and will rise automatically in the coming days.
The ECB base rate also dictates the rate at which banks pay interest on deposit and the Irish Financial Services Regulatory Authority is expected to watch closely to see that the banks pass on the increases to both depositors and borrowers. The speed with which banks pass on the rate increase will tell a lot about competition in Irish banking, said Labour's finance spokeswoman, Joan Burton.
Fine Gael said the rate rise would impose an additional financial burden on Irish families, making it imperative that tax credits and bands are increased in line with inflation in next week's Budget.
One financial institution, Northern Rock, announced it would pass on most of the rate increase to its deposit customers from January.
Although the ECB seemed to downplay the prospect of further interest rate rises, most economists believe rates have entered what is known as a tightening cycle. IIB Bank's chief economist, Austin Hughes, predicted yesterday that rates would rise by 0.75 of a percentage point to about 3.9 per cent during 2006 .
A generous budget and the maturity of Special Savings Incentive Accounts (SSIAs) would lessen the impact of higher rates on the economy, he said.
But research by IIB Bank and the Economic and Social Research Institute (ESRI) suggests that a 1 per cent hike would leave 50,000 borrowers feeling "a significant pinch".
Mr Trichet's comments yesterday that the ECB was not about to embark on a round of rate increases sent European shares to new highs.