An air of acceptance has been settling among mortgage-holders of late, as the message sinks in that interest rates are on the rise.
In a way, we have a lot to be grateful for - interest rates are at their lowest in 50 years and have been so for over two years. This has offered Irish homeowners a respite from mortgage-rate uncertainty, allowing household budgets to be drawn up without spiralling mortgage costs.
The reason for the stability has its roots in the bigger economies of continental Europe, where things have been ticking along rather slowly over the past few years. Given that the European Central Bank sets interest rates for all 12 countries that use the euro, it has had to take this poor economic performance into account when setting rates. The basic rule is that low rates make sense when economies are doing badly, as they make borrowing cheaper and stimulate activity.
The irony for Irish mortgage-holders is that our economy has been stronger than most of our euro-zone pals over the past few years. This has meant that, even though we could have coped with much higher interest rates, we had no choice but to manage with low rates.
Some say this has led to an overload in Irish borrowing, which could cause problems when rates are higher and loans more expensive to service. Time will tell how real the fears are, but it is generally accepted that a number of rate increases will be needed before any real pain is felt. This is because the ECB tends to move in quarter percentage points, rather than half or full points.
While the impact of a quarter-point move will become larger as mortgages get bigger, it still needs to be placed into perspective. Even on a mortgage of €500,000 over 30 years at today's rates, such a move would only imply an extra monthly repayment of about €68. The question is: how far can we expect rates to rise? And when will the pain make itself felt?
The answers to both took on more clarity this week, thanks mostly to comments made by ECB president, Jean-Claude Trichet, on Monday, and subsequently echoed by other ECB members. Possibly with an eye to all the speculation that has surrounded the ECB's intentions recently, Mr Trichet ruled out a series of rate increases. The markets have interpreted this as a signal that the ECB is not about to copy the Federal Reserve in the US, which has implemented 12 rate increases over the past year and a bit. It must be recognised that the Fed started this process at 1 per cent (the ECB is currently at 2 per cent), but it is also clear that it has arrived at 4 per cent fairly quickly.
Mr Trichet, for his part, believes there is no reason to confuse interest rate policy in the euro-zone with that of the US. "There is no process of catching up," he said.
So what about the question of when rates will rise? Well, the markets are now bracing themselves for a rate increase of a quarter point at the start of next month, probably followed by another quarter-point hike early next year. After that, a pause is seen as the most likely choice, although there is obviously no certainty at this stage. And of course we should always remember that a pause could be followed by more increases if the ECB decided they were needed.
umccaffrey@irish-times.ie
