With the ECB likely to introduce two more interest rate hikes this year, strap yourself in for a bumpy ride this winter
If there’s one thing households in this country don’t need right now, it’s a rise in European interest rates.
But it looks like that’s exactly what we’re going to get, and not one more this year, but probably two more rate hikes from the European Central Bank (ECB).
It is very likely that ECB governors will cumulatively increase their key interest rate by 1 percentage point, or even 1.25 percentage points, by the end of this year.
This would mean that a tracker mortgage holder, with €200,000 owed, would be hit with additional monthly repayments of almost €100.
This is on top of the ECB hike in July which added €45 for someone with a mortgage of this size with 25 years to pay. This would mean that monthly repayments would have increased by almost €140. Over one year, this represents more than €1,600 in additional reimbursements.
There are around 250,000 homeowners on trailing rates, with around 200,000 mortgage holders on variable rates. These borrowers are vulnerable to rising market interest rates.
The financial blows to household budgets follow one another in rapid succession.
We’ve had over 50 jaw-dropping price hike announcements from the various electricity and gas providers in this country since the start of 2021.
This means electricity bills are now around €900 higher per year than they were 18 months ago. Gas bills are on average around €800 higher per year, according to Bonkers.ie. And there’s likely more to come with wholesale gas prices at record highs following the Russians’ decision to “temporarily” halt gas deliveries to Europe at the end of this month.
The 1.5million homeowners who use heating oil are paying double what they paid last year for 1,000 litres, with the current price averaging €1,295, according to Oilprices.ie.
Food bills are expected to be €660 more a year than they were last year, according to research firm Kantar.
And families with children going back to school, and those going to college, are currently having to shell out huge sums of money to ensure that their offspring get an education.
So why is the ECB continuing to hike rates? After all, a majority of consumers expect higher interest rates from the ECB to make their financial situation worse, according to the Consumer Confidence Index released last week by KBC Ireland.
It looks like the ECB is desperate to kill the inflation beast and won’t be deterred even if it plunges Europe into a recession.
The ECB is resorting to the old method of trying to dampen demand in the hope that this will calm the searing inflation we are experiencing. However, the problem this time is that it is not demand that is fueling inflation but rather energy supply, with the Russians being largely responsible for this.
ECB Executive Board Member Isabel Schnabel summed up this view when she said: “Even if we enter a recession, inflationary pressures are unlikely to subside on their own.”
The series of rate hikes may well put out the fire of inflation, but at the risk of flattening the house in the process. Buckle up for a bumpy ride this winter.