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Mortgage holders are braced for the latest interest rate decision today from the European Central Bank (ECB), with opinion remaining divided in financial markets about whether another increase is on the way.

Reports that ECB economists were predicting higher inflation than expected next year is likely to be used by some members of the central bank’s governing council to push for another 0.25 percentage point rise. However, signs of weakness in the euro zone economy are building and the lack of any indication from the ECB on what it will do is seen as indicating a split on its council, with some arguing that it is better to sit tight now and see how things look at the time of the next meeting in October.

Reuters has reported that the ECB’s new inflation forecast – presented to its council on Wednesday – predicts that the inflation rate will average above 3 per cent next year, which is higher than expected and above the average market forecast of 2.7 per cent. Higher oil prices are also giving an upward push to inflation in the short term.

Will the ECB raise rates on Thursday or won’t it? ]

ECB’s hike-or-pause dilemma on interest rates going down to wire, poll shows ]

ECB interest rates have already risen nine times since last summer, a cumulative increase of 4.25 percentage points. This has brought the ECB’s deposit rate to 3.75 per cent and its so-called refinancing rate, from which Irish tracker mortgages are priced, to 4.25 per cent. While in some cases this has led to increased monthly repayments of €450 or more for Irish mortgage holders, the average rise to those on tracker mortgages has been in the €250-€300 range. Another 0.25 point rise at Thursday’s meeting would bring the average tracker rate to 5.6-5.7 per cent.

If the ECB does not increase interest rates, then its president, Christine Lagarde, is likely to underline that it stands ready to do so at its next meeting. She may also indicate the bank’s expectation that borrowing costs will remain high for a prolonged period, given that the rate of inflation remains stuck above 5 per cent, well above the ECB’s 2 per cent target level.

Irish inflation climbs to 6.3% in August as mortgage interest rates soar ]

Still, recent economic growth indicators for the euro zone have been poor, particularly in the manufacturing sector, and the European Commission this week cut its gross domestic product growth forecast for the EU this year from 1.1 per cent to 0.8 per cent, with Germany in a downturn. Business borrowing has also fallen sharply as interest rates have risen. The argument for leaving interest rates as they are is that if the ECB goes too far, it risks being blamed for contributing to a euro zone recession or a period of little or no growth.

The wider picture for borrowers who have been hit hard by the rises is that interest rates now look to be at, or approaching their peak. If the ECB does increase now – or in October – there is a strong chance that this will be the top of the cycle. When interest rates might fall will then be hard to predict.

For now, Lagarde is likely only to say that they will stay high for as long as needed – and hint that this will be for quite some time. Financial market interest rates imply an expectation that the ECB will start to cut interest rates in the summer of 2024, although over the past few years market views have changed very quickly as inflation took hold and so the outlook is unclear. Whether interest rates rise on Thursday or not, the message from Lagarde will be that the fight against inflation has not yet been won.

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