Despite economic risks, ECB paves the way for higher interest rates

Before war broke out in Ukraine, interest rates only went one way – up. Today, central banks are at an impasse, facing the risk of higher inflation but also an economic shock linked to soaring energy prices. Inflationary pressures usually point the way to higher interest rates, but by implementing this, central banks could worsen a potentially large economic blow from the war. So what are they going to do? And what will this mean for Irish borrowers and savers?

1. Context

Before the invasion, international interest rates were expected to rise steadily this year, led by the US Federal Reserve and the Bank of England. The ECB was expected to follow more slowly, with markets betting it would end its special pandemic bond-buying program later this year and raise its deposit rate, now minus 0.5%, to around zero. This was seen as paving the way for increases in its key refinancing rate next year. For Irish mortgage borrowers, this would have meant variable interest rates and some fixed rate offerings would have started to rise slightly this year. However, tracker rates would only have started to rise in 2023, as they are tied to the refinance rate. But now what?

Leslie M. Gill