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Most people fear moves to fight inflation by raising interest rates will actually leave them worse off


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Most people think the moves by the European Central Bank (ECB) to start raising interest rates aggressively to combat inflation will make a bad situation worse.

Existing borrowers worry their repayments will increase, while homebuyers expect the lending rate rises to make it harder for them to buy a home.

And a quarter of people even fear higher rates will trigger an economic downturn, according to the latest August consumer sentiment index from KBC Bank.

Overall, 69pc of consumers expect their personal financial circumstances to be hit by higher ECB interest rates.

Only one in 20 consumers feels European Central Bank rate hikes will improve their financial circumstances by leading to lower inflation.

The ECB hiked its key lending rates by 0.5 percentage points last month, warning of more to come as it tries to curtail inflation, which is causing the cost of living to get more expensive.

A separate question asked as part of the monthly sentiment survey was about the ECB rises. Of those who answered, one in four consumers feared higher rates could cause an economic downturn.

The survey also found one in five consumers expects to face higher borrowing costs.

Around of third of households have a mortgage, according to Census 2016 data. Half of these are on fixed rates, according to the Central Bank.

Economist Austin Hughes, who compiled the KBC survey, said consumers now feared higher borrowing costs when their fixed-rate mortgage terms expired.

In addition, consumers fear higher borrowing costs on their non-mortgage loans.

Concerns about rising borrowing costs are more prevalent among those aged 35 to 54 as well as Dublin-based consumers.

And one in six thinks it will make it harder for them to buy a home. This response was most prevalent among those aged 25 to 34, but it was also elevated for those aged between 35 and 44.

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Mr Hughes said this reflected the potential for a pronounced decline in affordability among prospective buyers at or approaching the margin where home ownership may no longer be possible.

Others are concerned that the value of their investments could fall.

Mr Hughes said the answers were more negative than might have been expected.

“In broad terms, there is a strong sense that higher interest rates could make a bad situation notably worse in coming months,” he said.

Mr Hughes said the KBC sentiment index showed only 1pc of consumers see higher interest rates improving their prospect of homebuying.

“So, the dominant feeling is that, in an Irish property market currently characterised by pent-up demand and problematic supply because of cost and capacity strains, higher ECB interest rates will principally constrain individual access to homeownership by hitting affordability rather than contribute to calmer property market conditions overall,” he said.

A number of economists are sceptical about the wisdom of the ECB raising rates.

This is because unlike previous inflation times, when excess demand was a problem, prices are being driven up this time largely by supply shocks centred on energy and food rather than excessive demand.

Only a tiny number of consumers expect banks to raise interest rates on savings accounts after the ECB rises.

Meanwhile, Irish consumer confidence weakened fractionally for a sixth month in seven in August, the KBC Bank Consumer Sentiment Index also showed.

But it was a limited change in the index. The index fell to 53.4 in August from 53.7 in July.

This took the index to its lowest level since October 2020 when it hit 52.6.

The August reading is well below the long-term series average of 86, suggesting a relatively gloomy Irish consumer at present.

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