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Second rise likely in June as oil costs boost inflation

Mortgage holders are facing more pain after 'hawkish' ECB members gain upper hand

Charlie Weston Personal Finance Editor

Published 16/04/2011 | 05:00

A SECOND rise in European Central Bank rates in June is now on the cards after figures out yesterday showed eurozone inflation climbed higher than expected in March.

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Last week the ECB raised its key rate from 1pc to 1.25pc in a move that will affect 600,000 homeowners with either trackers or variable rate mortgages.

The rise in the ECB rate was made to counter inflation in the 17-member currency group.

New figures out yesterday show eurozone inflation jumped to 2.7pc last month, according to the European Union's statistics office, Eurostat.

EU officials put the surge in prices down chiefly to the rising cost of fuel for transport and heating oil.

The ECB targets inflation of below, but close to, 2pc and headline price growth has been above that figure since December. The latest figures add to the case for further rises in interest rates.

Economist with KBC Bank Austin Hughes said he now expects a second rate rise in June, to be followed by another in September and another in December.

"These sort of inflation numbers mean that the hawkish members of the ECB have the upper hand in arguing for rates to rise faster than previously thought," Mr Hughes said.

A spate of mortgage increases will put added pressure on household budgets. Already one in 10 mortgage holders are struggling to meet their repayments.

A second 0.25pc rise in June would mean rates would have risen by 0.5pc in a move that would see monthly repayments jumping by €30 on every €100,000 borrowed.

A family with a €300,000 mortgage would end up facing additional repayments of more than €1,000 over a full year.

Mr Hughes expects rates to rise four more times, which would see the ECB rate at 3pc by the end of next year.

Eurozone rates hitting 3pc would mean eight separate rises of 0.25pc from last month's level.

Ulster Bank economist Richard Ramsey said the latest eurozone inflation figures made an ECB rate rise in June more likely.

Meanwhile, new figures from the Central Bank show how vulnerable mortgage holders in this country are to rate rises.

Just 15pc of residential mortgages are on fixed rates, one of the lowest in the EU.

This is despite repeated warnings that the ECB is set on a series of rate rises.

Just above half of residential mortgages are on trackers, with a third of the value of mortgages outstanding on either standard or loan-to-value variable rates.

Six out of 10 of buy-to-let mortgages, by value, are trackers.

Around a third of existing mortgages in the UK are fixed, figures produced by the European Mortgage Federation show.

In Germany, around a third of new mortgages are fixed for more than 10 years. Just 15pc of German mortgages are variables.

Irish Independent

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