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Interest rate increase threat

At any one time an economy faces myriad threats -- inflation, unemployment, soaring asset prices, low growth and poor productivity are just some of them.

But, increasingly, rising mortgage rates are becoming the most dangerous threat to our recovery. Ulster Bank predicts that interest rates could rise by between five and six times over the next two years, courtesy of the ECB.

This would hurt not just tracker mortgage holders, but also variable mortgage holders, already reeling from a succession of hikes, most notably from Irish Life & Permanent.

Interest rate increases are something householders expect and often budget for, but this time the safety valve that keeps the system fair and efficient -- allowing people to fix their rates -- is missing. Yesterday EBS became the latest lender to withdraw entirely its fixed rate mortgage offerings.

The depressing message from EBS to its customers seems to be: There is no way out. While there is a cold (but short-sighted) logic to these actions by the banks, such moves will have real and negative economic consequences. Firstly consumer spending, the key growth engine of the economy, will take a hammering. Secondly, the level of mortgage arrears will tick remorselessly up again. That is bad not just for the homeowners, but also for the rest of us.

Apparently the Irish banks are deaf to these arguments and in some respects the ECB is too. The ECB's role is to fight European-wide inflation, not worry about Irish homeowners.

But if the Irish economy is to recover -- to the benefit of the banks and incidentally the ECB -- further rate rises must be kept to a minimum. If rate rises by the Irish banks cannot be curbed, then the new government must look at other options to assist under-pressure mortgage holders.