Irish banks to benefit from ECB rate hike

The ECB will announce its first interest rate hikes in over a decade this week. He provided many indications of what will be announced.

Interest rates are expected to increase by a minimum of 0.25% or a maximum of 0.5%.

The ECB has said rates will rise 0.75% by September and, more worryingly, if the effect of the increases does not resolve the issues, rates could rise further.

Markets expect rate hikes to reach 2.5% in the current cycle of increases from July to December 2024.

These increases will have an undesirable impact on many households who are already struggling with substantial increases in utility and transportation bills. Inflation is currently around 9% and prices are rising at their fastest rate in almost 40 years.

The most telling aspect of the announcement will be the reaction of traditional banks.

Interestingly, Permanent TSB has indicated that it could absorb the first and possibly the second round of increases.

I don’t know how this will be possible for tracker-rate clients whose interest rate is directly linked to movements in the ECB’s base rate.

I would suggest they talk about their variable rate customers who, in the case of Permanent TSB and Bank of Ireland, are being charged the most expensive variable rates in the market today at 4% to 4.5%.

Traditional Irish banks will benefit more from higher interest rates than their European counterparts, as net interest income accounts for 80% of Irish retail bank income, compared to 54% in Europe.

The value of AIB shares has risen 25% this year, and Bank of Ireland shares have risen 37% as they have a larger UK loan portfolio, where base rates have risen from 0% to 1, 25% over the last seven months.

Three British banks have already raised their interest rates. In fact, one lender has raised rates twice in the past two months.

We have seen increases in fixed interest rates ranging from 0.2% to 1.2%. However, longer-term fixed rates, 15 to 30 years, have fallen at one lender.

Christine Lagarde, President of the European Central Bank Photo: Alex Kraus/Bloomberg

Consider the impact of the 1.35% rate hike proposed by the ECB. By taking out a mortgage loan of €300,000 over a period of 30 years, the monthly repayments of the mortgage loan will increase by €220, which is very significant.

I urge all variable rate mortgage customers to switch to long-term fixed rates now. Those with short-term fixed rates of two to five years will find that the cost of breaking their current rate is zero in many cases.

You have the option to upgrade to longer-term fixed rates that will give you security on the biggest monthly bill you have and, more importantly, give you peace of mind.

I remind these clients that you can make partial payments of 10% of the loan balance, each year during the long-term fixed rate, without penalty.

Michael Dowling is the managing director of mortgage brokerage Dowling Financial

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