Home loan hikes to cost €200 a month
Interest rates to rise faster than expected, experts say
Group Business Editor
INTEREST rates and mortgage costs are set to rise faster, economists say, with a total increase of more than 1pc likely by the end of the year.
The next interest rate hike could come in May, after surprise new figures yesterday showed business conditions in Europe at their best level for years, while debt continues to mount.
If the upsurge continues, the European Central Bank could hike the cost of money by three-quarters of a percent between now and Christmas, analysts say.
That would bring the ECB rate to 3.25pc - compared with 2pc at the beginning of December.
And that would push mortgage rates to above 4pc, adding around €200 to the monthly cost of a typical €300,000 mortgage.
Such a rise seems likely to cool the pace of house price inflation, which experts had said could reach 12pc this year.
The ECB is worried that booming house prices and borrowing has spread from countries like Ireland and Spain to other euro zone economies.
Figures from the ECB yesterday showed total euro area borrowing in February was 10pc higher than the same month last year.
Mortgage lending was up 12pc.
ECB President Jean-Claude Trichet said the housing market needs close watching.
"Euro area residential property prices are now in their sixth year of strong dynamism and at the same time growth in mortgage loans has increased substantially," he said.
"The hawks on the ECB governing council will be very concerned at the persistent strength of borrowing, while even the less hawkish will feel a little uncomfortable that rates are so low," said Austin Hughes, economist at IIB Bank.
The credit figures came on top of an unexpected surge in business confidence in Germany, Europe's biggest economy.
The most important business survey rose to a 15-year high in March, with firms reporting that current conditions had improved as well as their expectations for coming months.
"An ingrained pessimism has contributed to Germany's under-performance in the past decade," Mr Hughes said.
"So a turnaround in confidence may imply a stronger trend in investment by firms and spending by households."
Stronger economic growth would allow the ECB raise rates to a level which could reduce borrowing to more sustainable levels.
"It is now more likely that the next rise will come in May rather than June. They could then rise again in August, with a possible third increase by the end of the year," he said.
John Beggs, chief economist at AIB Global Treasury, has felt for some weeks that a May increase was on the cards.
"If they move in May, then they probably would be looking to two more hikes this year.
"But for that to actually happen, the economic data will have to confirm the upswing.
"There are a couple of things which could make the ECB pause, such as another rise in oil prices, or a fall in the dollar."
The outlook is for interest rates to continue rising, as the world economy moves away from the last few years of cheap credit.
The US Federal Reserve last night raised rates in a 15th consecutive hike, bringing them to 4.75pc, with no indication that they have yet reached their peak.