The European Central Bank announced today that mortgage-interest rates will rise again

   Photograph: Ronald Wittek/EPA

Germany: Mortgage interest rates will rise again after the European Central Bank increased its rate by three-quarters of a percentage point to 1.25 per cent on Thursday.

The lunchtime announcement means that interest rates have now jumped by 1.25 percentage points since July.

Although the Irish inflation figure fell for the first time in seven months — to 8.7 per cent from 9.1 per cent — when the Central Statistics Office released new data.

The European Central Bank is expected to frontload a series of rate hikes and sacrifice growth in the region due to the rising cost of living which is threatening to surge even higher. 

ECB Executive Board Member Isabel Schnabel’s speech in Jackson Hole set the tone for the upcoming policy meeting this week. With inflation in the euro zone projected to rise to at least 10% in the coming months and the risk of consumer prices rocketing higher, a “jumbo” rate hike of 75 basis points on Thursday is certainly a possibility.

“As frontloaded hikes can have a bigger impact on inflation expectations than a more gradual approach, a 75bp move could make sense,” said ECB watcher and Berenberg’s Chief Economist Holger Schmieding in a research note. 

“Although it is largely priced in, it could still exacerbate strains in the bond markets.”

Italian government 10-year yields have risen to 4%, the highest level since mid-June before the ECB announced the creation of an anti-fragmentation tool, as a result of the recent suspension of gas deliveries to Europe via the Nord Stream 1 pipeline. This has not only caused stocks to decline and raised the risk of a European recession. The government in Rome must pay more to borrow money because of Italy's high yields, which are far higher than those in Germany, raising concerns about the country's significant debt load.

Inflation in the euro zone reached 9.1 percent in August and is expected to reach double-digit levels in the coming months with continued pressure on energy prices. At the same time, the risk of a recession looms large over the region's economies as consumers feel the pain and cut back on their consumption and companies struggle with high energy prices.

There are limitations to how far the private sector can be protected from this revenue shock, according to Dirk Schumacher of Natixis in a research note to clients. "While governments would partially 'foot the bill,' there are.

"The recent decline in consumer confidence to a record low shows that households are aware of these restrictions on government assistance. Additionally, there is mounting evidence that businesses in energy-intensive industries are cutting back on production.

The bank now sees euro zone inflation at 8.1 per cent this year against a 6.8 per cent prediction in June, while the 2023 price growth estimate was raised to 5.5 per cent from 3.5 per cent. In 2024, the final year of its projection horizon, inflation is expected at 2.3 per cent, above its 2 per cent target.

The impact of high energy prices will weigh on growth, which is forecast to be 3.1 per cent this year against an expectation of 2.8 per cent in June. 

John Finn, Managing Director of Treasury Solutions said ECB rates would likely go over 2% over the next 12 months.

"We've had zero rates for so long. The new norm will be around 2% to 2.25%," he told Morning Ireland.

He said he did not see much prospect of the ECB backtracking on rate hikes in the face of a deteriorating economic backdrop.

"We've had artificially low rates for so long and with inflation running as high as it has, even if it settles back to 3% or 4%, you'd still expect interest rates of around 2%, so I can't see that happening," he explained.

In response to the 0.5% interest rate increase announced by the ECB in July, Mr. Finn said he was surprised that the major retail banks had not raised their rates. However, he predicted that they would do so following today's rate decision.

The one benefit of rate increases is that, after many years of low or negative deposit rates, depositors can anticipate receiving some money on their deposits.

"We're seeing it already. Large companies were being charged to put their money on deposit. That's disappeared in the last few weeks. There's some light on the horizon for depositors at least," he concluded.