The Governing Council of the European Central Bank has raised the three key ECB interest rates by 75 basis points.

Based on its current assessment, the ECB said it expects to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations.

The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 1.25%, 1.50% and 0.75% respectively, with effect from 14 September 2022.

Bank of Ireland signalled immediately that its tracker mortgage rate will increase by 0.75% from 28 September.

In a statement, the Governing Council said inflation remains far too high and is likely to stay above target for an extended period.

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According to Eurostat’s flash estimate, inflation reached 9.1% in August.

The ECB stated: “Soaring energy and food prices, demand pressures in some sectors owing to the reopening of the economy, and supply bottlenecks are still driving up inflation.

"Price pressures have continued to strengthen and broaden across the economy and inflation may rise further in the near term.

“As the current drivers of inflation fade over time and the normalisation of monetary policy works its way through to the economy and price-setting, inflation will come down.

"Looking ahead, ECB staff have significantly revised up their inflation projections and inflation is now expected to average 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024.”

What 0.75% increase means for mortgage repayments

According to MyMortgages.ie, based on a loan amount of €200,000 with 25-year term remaining 

• Tracker customers of ECB +1% - currently 1.5% increasing by 0.75% to 2.25% in September. Monthly repayment increases from €799.87 to €872.26 and an additional €21,716.62 interest will be repaid.
• Variable rate customers of 3.15% increasing by 0.75% to 3.9% in September. Monthly repayment increases from €964.10 to €1,044.66 and an additional €24,168.67 interest will be repaid.
• Fixed rate customers of 3.5% fixed for 20 years increasing by 0.75% to 4.25% in September. Monthly repayment increases from €1,001.25 to €1,083.48 and an additional €24,668.72 interest will be repaid.

The Governing Council noted that after a rebound in the first half of 2022, recent data point to a substantial slowdown in euro area economic growth, with the economy expected to stagnate later in the year and in the first quarter of 2023.

The view from the ECB is that very high energy prices are reducing the purchasing power of people’s incomes and although supply bottlenecks are easing they are still constraining economic activity.

“In addition, the adverse geopolitical situation, especially Russia’s unjustified aggression towards Ukraine, is weighing on the confidence of businesses and consumers.

"This outlook is reflected in the latest staff projections for economic growth, which have been revised down markedly for the remainder of the current year and throughout 2023. Staff now expect the economy to grow by 3.1% in 2022, 0.9% in 2023 and 1.9% in 2024,” the ECB statement declared.

Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP)

The Governing Council clarified that the ECB intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it started raising the key ECB interest rates and "for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance".

As concerns the PEPP, the ECB intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024.

The central bank stressed that  the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

“Redemptions coming due in the PEPP portfolio are being reinvested flexibly, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic,” the central bank stated.

Euro floor

Altaf Kassam, EMEA Head of Investment Strategy & Research at State Street Global Advisors, commented that the ECB had to respond forcefully to criticism of falling behind the curve, especially with the worry that second-round effects were starting to taking hold.

“This hike was also about putting a floor under the euro, and keeping a lid on the extra imported inflation its weakness had brought,” he added.

“Going forward, we expect the ECB to slow its pace of rate rises, hiking another 50bps in October and 25bps in December – yielding a policy (deposit) rate of 1.50% by year-end.

“Today’s super hike was less frontloading and more catching up, but should give the ECB breathing space to focus on other matters such as potentially ending APP reinvestments and activating the Transmission Protection Instrument.

“As the ECB’s revised forecasts showed, 2023 is looking to be a grim year, and the Central Bank needs as much flexibility as possible.”