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The debate on the topic of interest rates – how high they could go, and when they might begin to fall – is compelling, if not terribly reassuring.  Interest rates impact our clients at all levels, be they residential or commercial sellers, purchasers or renters. The organisation charged with deciding and implementing interest rate policy across the Euro area is the European Central Bank. Set up in 1998, it makes its decisions regardless of political influence.

It sees its role as making sure inflation remains low, stable and predictable, saying; “price stability is best maintained by aiming for 2% inflation over the medium term.” The problem is, inflation has greatly exceeded that target in most European countries, including Ireland where the annual rate of inflation stood at 6.1% in June, albeit down from 6.6% in the year to May, according to the CSO.

There has been much comment about the ECB being too slow to raise interest rates from zero in 2016 until it made the first upward movement in July 2022. In just 12 months rates have climbed rapidly with the main refinancing rate reaching 4.25% in July. The question is, where to now? Such decisions have a major impact on all borrowers. It’s clear ECB board members have diverging views, but could be said to have become generally more hawkish.

The Financial Times recently asked what explains inflation’s persistence in the face of aggressive rate rises. Saying that monetary policy (ECB decisions) always come with a lag, taking about 18 months for the impact of a single rate increase to fully seep through into spending patterns and prices, the publication said; “Some central bankers and economists believe lags may be even longer – and the eect of the tightening less potent – this time around.”  Ouch. It quotes sources as saying a long-term shift away from manufacturing towards services, which require less capital, could also mean “slower transmission of a tighter monetary policy”. Additional contributory factors it points to in delaying the desired eect of higher interest rates reducing inflation are the trend whereby now more households either own their property outright or are renting and the fact that fixed-rate mortgages, as opposed to variable rate ones, are now more popular.

Quite apart from the question that some commentators have raised, such as should the ECB’s rigid 2% inflationary target be raised, perhaps to 4%, the apparently unraised question in this worrying environment is, why should borrowers, particularly mortgage holders, bear the burden of the cost of taming inflation, when inflationary factors such as energy and food prices are not within their control?  As Warren Buet, renowned financier and head of Berkshire Hathaway, once said: “Only when the tide goes out do you discover who’s been swimming naked.” Unless there is new thinking invested in this policy, it’s all too predictable who may find themselves swimming among sharks.

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