The cost of living in Ireland could increase if the European Central Bank (ECB) takes steps to eliminate high inflation. In that instance, headline EU interest rates could rise to 6% and Irish mortgage rates to 8% minimum. Headline inflation encompasses food and energy.
That’s if the bank applies the same approach as the former US Federal Reserve chairman Paul Volker did in the late 70s. His decision to wreck the country’s manufacturing base to beat rising prices resulted in US interest rates reaching 22%. A recession followed, interest rates collapsed and inflation vanished in daily prices and wages.
Another US interest rate attack on inflation is on the cards if the Fed is to reach its inflation goal of 2%. It raised its benchmark interest rate by 50 basis points in the week of May 9, 2022. This is the largest single rate hike in more than 20 years.
In Ireland, interest rate increases work through the housing market and more than half the current mortgages, mainly for primary homes, are on floating interest rates. As of 31 December, 2021, there was just under EUR 70 billion worth of outstanding credit advanced to Irish households for property purchases, according to the Central Bank. What’s more, the average interest rate on new mortgage loans granted in Ireland was 2.76% in February 2022. That’s almost double the eurozone average. The value of those mortgages is around EUR 626 million. The average first-time buyer in Ireland is paying around EUR 2,200 more per year on their repayments.
Today, increasing energy and food prices, mortgage hikes, and falling wages mean significantly more belt-tightening over the next 24 months.