According to the Economic and Social Research Institute (ESRI), Irish householders are likely to be affected by the increase in interest rate initiated by the European Central Bank (ECB). A leading government think tank believes that Ireland could be more at risk than any other member of the European Union. Fed chair Janet Yellen warns that this will have major repercussions for Irish homeowners, firms and Exchequer.
ECB planned to hike interest rates
The European Central Bank designed policies in order to deal with the financial crisis and its aftermath. It was done with the purpose of normalizing the monetary policy in the Eurozone. Mario Draghi, the President of ECB, bought more than €2trn of bonds in a Quantitative Easing (QE) programme. Introduced by the ECB in 2015, QE is a form of monetary stimulus that helps in boosting inflation. It is supposed to end in September 2018 and any increase in interest rate will happen only after this. However, the ESRI clearly warns that any potential interest hike can pose a threat to Ireland.
The current official ECB rate stands at a mere 0.05pc while that of the Bank of England is 0.5pc. These are considered to be the lowest rates, even lower than during the Great Depression of the 1930s.
House prices are expected to rise
As there is a close relationship between housing demand and key economic variables such as income levels and interest rates, house prices are expected to rise with the hike in interest rates. According to the ESRI, house prices may rise by at least 20 percent for up to seven years in Ireland. Nevertheless, Prof Kieran McQuinn, who is the author of the ESRI report reveals that prices could rise higher and in no time.
Debt service burden will increase
The head of Bank of Ireland says that the Irish market is vulnerable to an interest rate hike because there is a high number of variable rate home loans and trackers. An increase in interest rates is likely to affect householders by reducing their consumption of goods and services. The interest rate hike can also moderate the investment activities of various firms. Consequently, there could be higher levels of loan defaults as both firms and households are greatly indebted from the Irish financial crisis. High borrowing costs will affect consumers’ ability to pay back their loans and their spending costs. The Bank of Ireland assured that variable rate mortgages are normal in Ireland. Borrowing costs rise and fall with official interest rates and this has been the norm for ages.
Emer Lang, Davy banking analyst, clearly explains that the impact of interest hikes on banks and their tracker customers will depend on the state of the economy, the magnitude of any increase and its timing.
The threat of an interest rate hike is far away
Mario Draghi, the President of ECB recently revealed that the threat of a hike in interest rates could happen in 2020 only even though the Eurozone is expanding at a fast rate. According to the Organisation for Economic Co-operation and Development, raising interest rates before the end of the decade could have serious implications on the economy’s recovery in the Eurozone.
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