The European Central Bank (ECB) has announced a rise in its key interest rates today, the first in more than a decade. What will this mean for consumers?
By how much did rates rise when the ECB met today?
A: The governing council of the ECB had previously indicated it would increase its key interest rates by a quarter of a per cent -. However, it instead decided to go for a bigger hike of half of a per cent . ECB president Christine Lagarde has already said the hike will be followed by a rise in September if inflation stays high. Eurozone inflation is 8.6pc, so a rise of at least another half of a per cent in rates is expected in September.
Why are rates going up?
A: The ECB hopes that by raising rates it will control inflation. The idea is to weaken demand by making it more expensive to borrow. It is hoped this will prompt households and businesses to hold off spending, which in turn eases price pressures. The ECB is expected to put up both its deposit rate – the interest it charges banks for holding money – and its refinancing rate. The refinancing rate is currently zero, and is the rate that determines what you pay on your tracker. The ECB deposit rate is minus half a per cent. However, paying banks for savings may encourage them to pay higher deposit rates, which would in turn crimp spending. But others think it is a terrible time to raise rates and will only push the EU into recession.
I am on a tracker, so when will my lending rate rise?
A: The interest rate you pay on your tracker is contractually linked to the ECB’s refinancing rate. You pay a margin, usually 1pc, plus the ECB refinancing rate. So, if the ECB refinancing rate rises, you pay more. The State’s 250,000 tracker customers will be given one month’s notice of their bank charging them higher mortgage interest after the ECB raises its rate. Each quarter of a per cent rise in the ECB rates will cost €30 more in monthly repayments for a €250,000 tracker mortgage over 25 years. This means this week’s rate rise could cost an extra €720 over a full year.
What will happen to variable rates?
A: That is the great imponderable. There are 200,000 mortgage holders on variables. Banks have the capacity to absorb ECB rate rises of at least half a per cent without passing the cost on to variable-rate customers, according to Permanent TSB boss Eamonn Crowley. Certainly, Bank of Ireland and Permanent TSB charge such high variable rates – up to 4.5pc – so they can afford to absorb some pain on variable costs, according to brokers Michael Dowling. Variable and other rates in this country are way above those charged in other eurozone nations, so there is scope for banks to be generous.
I’m on a fixed rate. What happens to me?
A: You get to stay on that rate until your term ends. So, if you have fixed at 3pc for three years, you pay that rate for three years. At the end of the fixed period, be prepared for fixed rates to have moved higher in the intervening period, along with variable rates.
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