Uncertainty in money markets has been triggered by the demise of Silicon Valley Bank and Signature Bank
The collapse of America’s Silicon Valley Bank (SVB) may force the European Central Bank (ECB) to rethink its plans for a string of interest rate rises this year.
Economists said the ECB was still expected to announce a 0.5 percentage point rise this Thursday. Some ECB governors had called for four rate rises this year.
However, the uncertainty triggered in the money markets by the collapse of SVB may mean there are fewer rate rises this year. The collapse of SVB last week was the second biggest in US history in terms of assets. Its demise raised concerns it would spark a wider crisis in the financial sector worldwide, especially since a second lender – Signature Bank, in New York – has also been shut down by US authorities.
ECB rates have gone up five times this year, with the refinance rate now at 3pc. This determines tracker rates. Fixed and variable rates tend to be priced off it.
Economist with Goodbody Stockbrokers, Dermot O’Leary, said: “The market uncertainty has triggered a rethink on rate expectations in the market.”
He added the peak expectation in the market, as recently as last week, was that the refinance rate would go to 4.5pc.
But the markets are now pricing in a peak expectation that it will go to 3.75pc instead.
Mr O’Leary said market jitters may be eased by the actions of the US authorities.
“At a minimum, it is likely to lead to central banks being a little more cautious on the language that they use with regard to future rate increases, but it is unlikely to change the ECB decision to raise rates by 0.5 percentage points this Thursday,” Mr O’Leary said.
Independent economist Austin Hughes said the collapse of two US banks meant the financial system was fragile. This led to the probability that the ECB would “not go quite as far, quite as fast” on interest rates.
He said rising interest rates were bad for some banks, such as SVB, because they had a big exposure to US bonds at interest rates that were lower than rates currently.
This meant they made losses when they were forced to sell the bonds when depositors demanded their money.
Each 0.5 percentage point increase in ECB rates raises monthly repayments for tracker customers by €25 for every €100,000 borrowed, according to the Association of Irish Mortgage Advisors.
The five rate rises so far have cost a family with €100,000 left to repay on a tracker €1,500 over a year in higher mortgage repayments.
Thursday’s rate rise means tracker customers will have to repay €1,800 more a year since last summer on each €100,000 borrowed on a tracker.
Last week, Permanent TSB hiked fixed rates for the third time since the summer.
It increased its fixed rates by 0.75 percentage points this time. Fixed rates for a standard first-time buyer will now be more than 4.5pc.
There has been a spate of increases in lending rates from AIB, Bank of Ireland, Permanent TSB, Ulster Bank, Avant Money, ICS Mortgages and Finance Ireland.
Higher ECB rates directly affect around 300,000 people who have tracker rates, while it means banks raising the cost of new mortgages for first-time buyers. Around 50,000 homeowners are due to come to the end of fixed rates over the next three years.