Households face higher costs as ECB set to raise rates

The European Central Bank (ECB) is poised to raise its key interest rate by 0.25% this week, a move widely expected to bring the rate to 2.25%. This marks a significant shift as the bank initiates a cycle of rate increases aimed at curbing persistent inflation. It is the first such increase since 2022, following the energy price shock triggered by Russia's invasion of Ukraine.

The anticipated rate hike next week is further influenced by a recent jump in oil costs, partly due to the Iran war, which is now directly contributing to the rising cost of living. For Ireland, this decision will translate into higher monthly repayments for approximately 110,000 tracker mortgage customers. The broader interest rate environment will also shift, placing upward pressure on other home loans and general borrowing costs.

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We are moving away from our baseline.

For example, a 0.25% increase on a €300,000 loan over 25 years would add an estimated €37 per month to repayments. Many consumers are currently exploring fixed-rate mortgages offered by Irish banks, finding them more attractive than variable loans. However, as interest rates generally rise, new fixed-term loans are expected to become more expensive over time, affecting both new customers and those whose existing fixed loans are expiring.

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Fixed rates will change but not necessarily by the full ECB rate change.

Michael Dowling, an advisor with Irish Mortgage Brokers, noted that fixed rates will adjust but "not necessarily by the full ECB rate change." He suggested that major Irish banks like AIB, Bank of Ireland, and PTSB have "plenty of room to absorb" some of the increases if they choose. Analysts anticipate that Thursday's expected rise will likely be followed by at least one more increase later this year, possibly in September.

The ECB's inflation target is 2%, but the current increase in the cost of living stands at 3.2% across the 21 euro-using countries, and was estimated at 3.5% in Ireland in May. In April, ECB President Christine Lagarde signaled the bank's intention to act, stating, "We are moving away from our baseline," which is understood as code for impending action against inflation. Rising prices disproportionately affect less affluent populations. In Ireland, increased fuel costs led to nationwide protests in April, prompting the government to temporarily reduce excise duties on petrol and diesel. These tax cuts are set to expire at the end of July but may be extended. A planned increase in carbon tax has also been postponed until October.

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have plenty of room to absorb