Mortgage holders likely to face two more rate hikes, Irish Central Bank governor says

Apr 14, 2023

Central Bank governor Gabriel Makhlouf says he expects the European Central Bank (ECB) to make two further interest rate hikes in the coming months and for rates to remain elevated for longer than markets anticipate.

His more hawkish comments reflect ECB concerns that while headline inflation is falling, underlying price growth, driven by increased wage demands, remains strong. The ECB's governing council will hold its June meeting next week.

"In my view what's likely to happen next week is that the ECB is likely to move interest rates up again," Mr Makhlouf told journalists at the publication of the regulator's semi-annual Financial Stability Review. He said a further rate hike in July was also "probable" on the basis of current price data, noting "underlying price pressures remain strong".

To combat inflation, the ECB has raised interest rates by 3.75 percentage points since last July, the most aggressive ramping up of rates ever undertaken by the bank.

Debate has now shifted to where the tightening should end in the fight to get the euro zone's inflation back to the ECB's 2 per cent target rate.

Mr Makhlouf's comments suggest Frankfurt could lift rates by a further 50 basis points – half a percentage point – to 4.25 per cent before pausing.

"Once we’ve reached what I would describe as the top of ladder of increasing interest rates, we’re likely to stay there for a while," he said, dampening speculation that the ECB could cut rates by the end of the year if inflation keeps falling.

In its review, the Central Bank warned that global financial risks have increased as the financial system makes "its sometimes turbulent adjustment to persistently high inflation and the necessary monetary policy response".

"Vulnerabilities built up in segments of the global financial system during a decade of low interest rates have been exposed, as evidenced most forcefully by the failures in March of a number of US banks and Credit Suisse," it said.

While many in Ireland are stretched by the cost of living, it said households and businesses are proving resilient to the inflationary shock so far "owing in part to the significant reduction in private indebtedness over the past decade."

A decade of prudent lending is supporting resilience to rising interest rates, it said.

The review also noted that profits in the banking sector here continue to grow due to higher interest rates. Retail banks have been slow to increase deposit rates in response to ECB rate changes and have profited from low-paying current accounts.

"The banking system has capacity to absorb potential future shocks, while banking sector profits continue to grow due to higher interest rates," it said.

Amid concern about premium pricing by non-bank mortgage providers, the regulator said non-bank lenders "are showing signs of a more rapid retrenchment in credit supply, most visibly inthe mortgage market".

The pass-through of ECB rate hikes to customers from non-bank lenders has been more aggressive than conventional lenders. In some cases, non-bank borrowers are now paying variable rate of up to 8 per cent, well above the State average.

The Central Bank estimates that about 38,000 borrowers are stuck in overpriced mortgages but can't move back to mainstream banks.