The decision by the ECB to raise interest rates by 25 basis points to 1.25%, which is projected to be the first in a series of similar increases this year, is a worrying development as far as Irish economic recovery is concerned. It should be noted that although inflation in the UK is significantly higher than in the Eurozone as a whole, a corresponding interest rate increase has not yet occurred there, chiefly due to worries that this would lead to a further impact on consumer demand and thus affect growth. Clearly it indicates a problem within the Eurozone in that the rate increase suits some member states but is inappropriate for more fiscally threatened countries such as Ireland, Greece, Spain and Portugal.
The more immediate domestic concern is the effect a series of interest rate increases will have on those mortgage holders already struggling in arrears. There is a rule of thumb that for each quarter point increase in ECB rates, one can expect to pay an additional €15 per month for every €100,000 of a mortgage. We remember the bonanza of property sales in prerecessionary times where it was not unusual to witness purchases in the €750,000 to €1.25 million price range by those on middle-class incomes. For these people, the extra monthly payments that would be brought on by three ECB interest rate increases in close succession starting this year would be very considerable. At a time when domestic consumer demand needs to increase, a policy has been set in train by the ECB that will substantially cause an adverse impact in this regard. Many institutions have already increased their interest rate significantly and independently of an ECB rate change. On this basis, serious consideration should be given to the suggestion that the full ECB rate changes should not be passed on by Irish-based institutions to mortgage holders, in total or at least in part, given the ongoing need to aid the overall health of the economy.
Similar concerns persist in relation to these projected rate increases in relation to a country such as Spain, which has had a similar property bust experienced by Ireland. Given the particular need to prevent the crisis currently affecting Portugal to ultimately spread to Spain, the latest rate increase should be regarded as misaligned. It is clear that the ECB has lent a misplaced priority to the battle against inflation instead of the much more pertinent war on debt with respect to fiscally fragile member states.
