THE EUROPEAN Central Bank (ECB) has played down suggestions there will be a series of interest rate hikes but has left open the possibility of raising rates next month to curb record inflation even as economic growth slows across the euro zone.
The indications came as the Federal Reserve left its benchmark interest rate at 2 per cent, ending the most aggressive series of rate cuts in two decades, as higher energy costs threaten to boost inflation. “Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased,” the Federal Open Market Committee said.
ECB president Jean-Claude Trichet signalled on June 5th that the bank may raise its benchmark lending rate by a quarter point to 4.25 per cent at its next meeting on July 3rd, as record oil and food costs have pushed euro zone inflation to 3.7 per cent, well above the bank’s limit of below 2 per cent.
“I said that we could increase rates by a small amount in order to secure a solid anchoring of inflation expectations,” Mr Trichet told the European Parliament in Brussels. “I didn’t say that we could envisage a series of increases.”
Speaking at the launch of a survey of mortgage brokers by IIB Bank and the Independent Mortgage Advisers Federation (IMAF), the bank’s chief economist Austin Hughes said he expected two quarter-point ECB rate increases this year.
According to the survey, almost two-thirds of brokers said the mortgage market had deteriorated over the past three months, while 57 per cent, or almost six times as many as in March, expect business to decline over the next three months. Some 80 per cent of brokers said tighter lending rules and higher borrowing costs had led to the deterioration in the market.
Mr Hughes said 50 per cent of brokers had said “the credit crunch has begun to bite”, with first-time buyers and investors being the worst affected. He said “top-up” mortgages had risen as borrowers opted to renovate rather than move.
He said falling house prices could have generated demand in the mortgage market, but that the credit crunch had “intervened”, forcing banks to raise rates and tighten lending rules. He said the outlook was “very gloomy”.
IMAF president Paul Short said the average maximum loan-to-value (LTV) on mortgages was 90 per cent to first-time buyers, 80 per cent for investors and between 75 and 80 per cent for switchers.
Bank of Ireland has become the latest bank to raise mortgage rates and tighten lending rules, blaming “current market conditions”.
The bank reduced the maximum LTV on switcher mortgages sold through its broker subsidiary, ICS Building Society, from 75 per cent to 50 per cent. The bank has also said that the customer’s existing mortgage must now be drawn down for more than two years with their current lender.
It has capped the LTV on mortgages for customers trading up and releasing equity to 90 per cent, and said 100 per cent mortgages were no longer available through brokers.
The bank also reduced the maximum mortgage to buy-to-let investors by 5 percentage points across all the landlord mortgages, from 90 to 85 per cent.
