Growing risk ECB interest rate rise will be bigger and sooner than expected

Financial markets now expect that ECB rates could rise by 1 percentage point this year, with the first hike by the end of the summer.

It comes as new figures from the Central Bank of Ireland show that mortgage rates in this market remained static in January.

ECB governing council member Peter Kazimir said the ECB is still in a “good place” and there’s no need to act at next week’s meeting.

But he said he is concerned that memories of the region’s 2022 inflation shock have lowered the threshold for businesses to raise prices and consumers to demand higher pay.

Upside risks clearly dominate the outlook, he said.

“For the time being, we need to stay calm,” he said, even though “I’d say a reaction by the ECB is potentially closer than many people think”.

“I don’t want to speculate about April or June. But we will be ready to act if needed,” Kazimir said in an interview in Frankfurt with the Bloomberg news service.

Analysts at the Dublin offices of specialist bank Investec said financial markets are now increasingly pricing a 0.25 of a percentage point rate hike by September.

Markets expect another 0.70 of a percentage point rise by the end of the year following Mr Kazimir’s comments.

The ECB is expected to hold rates at its meeting next week and outline scenarios for growth and inflation should the conflict drag on.

Meanwhile, Irish mortgage rates remained static in January, according to new data from the Central Bank of Ireland.

The average mortgage rate for the month was 3.50pc. This is the same as for December, and down from 3.82pc a year ago.

This leaves Irish mortgage rates at their lowest level since February 2023 and the seventh highest in the now 21-member Eurozone.

The Eurozone average was 3.39pc.

Daragh Cassidy, head of communications at mortgage broker Bonkers.ie, said Irish mortgage rates have been on a slow but steady downward trend for much of the past two years.

“Looking forward, the outlook for mortgage rates has become more mixed as a result of renewed conflict in the Middle East.

“Before the conflict broke out, the general expectation was that the ECB would keep rates on hold for the rest of the year. In fact, there was even a small chance the ECB could cut rates by a quarter point if inflation stayed below the bank’s 2 per cent target.

“But if the conflict drags on, and leads to a prolonged increase in energy prices and general inflation, we could be looking at a hike in rates. This could then feed through into higher mortgage rates for households.”

Mr Cassidy said anyone on a fixed rate is protected for now as their rate won’t change until the end of the fixed term. But those on variable rates might be wise to assess their options.

“During the last energy crisis following Russia’s invasion of Ukraine, the ECB increased rates by 4.5 percentage points in a short space of time.

Mr Cassidy said another hike of this scale is currently highly unlikely.