Consumers could face another ECB interest rate hike, Makhlouf warns

Central Bank governor Gabriel Makhlouf said he would not rule out another interest rate hike from the European Central Bank (ECB) while warning the impact of higher rates has yet to be fully felt across the economy.

Some 40-50 per cent of mortgage holders have yet to see their monthly repayments rise as they are on fixed-rate contracts agreed before the current cycle of ECB rate hikes, but about 140,000 borrowers will roll out of fixed products over the coming two years.

At the publication of the bank’s latest Financial Stability Review, Mr Makhlouf also signalled the bank’s strict mortgage lending rules had been left unchanged for another year and that he did “not foresee regular changes” to the rules, which limit how much home buyers can borrow.

While the initial inflationary surge has eased, the governor said headline inflation remained above the ECB’s 2 per cent target rate and that another rate increase was not off the cards. “I would not rule out the possibility that we have to go up another rung,” Mr Makhlouf said.

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He also said the full impact of higher interest rates has yet to be felt by borrowers here and this posed an uncertainty in terms of the wider economic outlook.

“The lagged effect of monetary policy actions remains a source of uncertainty for the domestic economy, as the financial system continues to pass through higher interest rates gradually to borrowers and depositors,” he said.

Central Bank officials later confirmed that 19 per cent of mortgage holders here, equating to almost 140,000 borrowers, were due to roll off fixed contracts in the next 24 months.

To combat inflation, the ECB has raised lifted interest rates 10 times in the last 17 months – from zero to 4.5 per cent – in the most aggressive ramping up of rates ever undertaken by the bank.

Most analysts believe the bank’s decision to keep its key policy rates unchanged in October – combined with the decline in headline inflation – signalled an end to the current cycle of rate hikes.

Amid speculation the ECB would start cutting rates next year, Mr Makhlouf said it was “far too early to start talking about going down the ladder”. He repeated his mantra that the ECB’s next move would be “data-dependent”.

The regulator’s latest review said the Irish economy was continuing to expand in terms of modified domestic demand – a better indicator of underlying growth than GDP – despite the changed economic environment, but at a more moderate pace.

“In aggregate, Irish households and businesses continue to weather the inflation and interest rate shocks, owing to labour market strength, interest rate fixation and healthy balance sheets,” the review said.

However, it noted that the pick-up in borrowing costs had triggered “tentative signs of early arrears flows among pockets of household and business lending”.

It also highlighted a pronounced slowdown in the commercial real estate sector driven by cyclical shocks related to higher interest rates and structural shocks related to a fall-off in demand for office space linked to an increased incidence of remote working.

“Commercial real estate prices have now fallen more than 20 per cent since mid-2020, while slowing exports and corporation tax receipts may mark the beginnings of a weaker global economy feeding its way through to Ireland,” Mr Makhlouf said.