ECB ready to raise interest rates to control inflation

The European Central Bank is expected to raise interest rates later today for the first time in eleven years.

Markets expect at least a quarter of a percent increase, but reports suggest the ECB could go further and opt for a 0.5% hike.

The bank is under pressure to raise rates to tackle high inflation which is hovering around 8.6% in the euro zone and 9.1% here in Ireland.

This hike will end an extraordinarily long period of stable and historically low or even negative rates, with the ECB’s main lending rate stuck at 0% since March 2016 and its deposit rate at -0.5% since 2019.

However, the bank has to walk a tightrope as the European economy struggles to sustain growth under pressure from the war in Ukraine, the energy crisis, inflation, supply chain issues and more. challenges.

If the bank raises rates too much or too quickly, it could add to these difficulties, further stifling economic performance in the euro zone.

It could also increase pressure on the most indebted countries in the 19-member eurozone.

Higher rates will mean higher borrowing costs for consumers and businesses.

Around 390,000 households have standard or tracker variable rate mortgages, which should increase with the rise in the ECB.

“All eyes will now be on lenders to see how they react,” said Joey Sheahan, credit manager at online brokerage MyMortgages.ie and author of Mortgage Coach.

“However, one thing is certain, the ECB rate hike will affect hundreds of thousands of short and medium term mortgage holders.”

“While switching activity has been intense this year so far, we expect a flurry of activity over the next few months as people move in to try and lock in fixed rates and hedge somewhat against further rate hikes.

The ECB announced that it also plans to raise rates again in September, with another 0.5% hike expected.

“However, given the uncertain economic outlook, the ECB is unlikely to signal a more aggressive tightening cycle than currently expected by markets – 1% by the end of 2022, 1.25% by mid-2023. “said Davy chief economist Conall MacCoille in a recent preview note.

Other central banks have moved faster and more aggressively to fight inflation, raising rates in large increments of 0.75% and 1%.

Also at today’s meeting, the ECB is expected to finalize a new instrument designed to contain excessive sovereign bond spreads as the bank’s bond-buying programs end and rates rise.

In particular, it could help Italy whose cost of borrowing has risen lately amid political uncertainty in government and mounting debt of 2.759 billion euros.

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