Stephen Hamilton predicts no relief: ECB interest rates set to stay high until 2025

“ECB Expected to Raise Interest Rates Again, but Will it Reach a Peak?”
Stephen Hamilton predicts no relief: ECB interest rates set to stay high until 2025

The European Central Bank (ECB) is expected to raise interest rates by 0.25% this week, but the question remains whether this will be the peak or if rates will continue to rise. In a recent interview with Bloomberg, Dutch economist and ECB governing council member Klass Knot suggested that we may be nearing the end of interest rate hikes. He noted that inflation has “plateaued” and any further action from the ECB beyond July is not certain. European inflation has nearly halved since its peak in October 2022, indicating that inflation may be under control. However, the situation is more complex than it seems.

Some members of the ECB believe that interest rates should continue to rise, with another hike expected in September. ECB President Christine Lagarde emphasized earlier this year the importance of battling inflation and maintaining resilience. On the other hand, Knot and ECB Vice President Luis de Guindos are more optimistic, suggesting that underlying inflation may be peaking. While the end of interest rate increases may be in sight, it is unclear when we will start to see decreases in rates. Factors such as inflation, domestic demand, and the situation in Ukraine will continue to influence the ECB’s decisions in the future.

Irish tracker mortgage holders and those seeking fixed-rate mortgages should not expect interest rates to decrease anytime soon. Knot has expressed pessimism, stating that he does not foresee the ECB lowering rates before 2025. This has significant implications for Irish mortgage seekers and homebuyers. Tracker mortgage holders will continue to see their rates increase in line with the ECB rate. However, variable and fixed-rate mortgages are not as closely correlated to the ECB rate. Since last July, the ECB has raised rates by 4%, but Irish banks have only increased their rates by around 1.5 to 2%. This is because Irish mortgage interest rates are now more closely tied to savings and deposit rates offered by banks.

Irish banks and mortgage lenders are under pressure to raise savings and deposit rates, which in turn puts pressure on them to increase mortgage rates. The main source of funding for new mortgages for Irish lenders comes from the savings they acquire through deposits. As savings interest rates rise in the coming months, we can expect to see a corresponding increase in variable and fixed mortgage interest rates.

Despite the ECB and mortgage rate hikes over the past year, there has been little impact on the demand for mortgages and housing in Ireland. Recent figures from the Irish Banking and Payments Federation Ireland show that the value of mortgage approvals for home purchases rose by 17% year on year in May. First-time buyers are driving the demand for mortgages, benefiting from looser lending policies and government schemes such as the Help to Buy Scheme and the First Home Equity Scheme. With renting still being more expensive than buying and paying a mortgage, demand for mortgages is expected to remain strong.

For those seeking a mortgage, it is crucial to seek advice from an expert. The amount you can borrow and what you pay can vary significantly between mortgage lenders. Consulting an independent mortgage broker is strongly recommended.