The European Central Bank’s (ECB) expected hike in interest rates could help “contain” house prices and bring down inflation, the Tánaiste has said.
The ECB is expected to announce a 0.75 per cent increase in interest rate, the third hike this year.
Leo Varadkar said that while the rise will not be welcomed by mortgage holders or borrowers, it will help bring down inflation and could bring down house prices.
The governing council is expected to raise rates by three quarters of a percentage point later on Thursday.
This will bring the main lending rate to 2 per cent.
The move will mean Irish householders will see their mortgage rates rising.
“The European Central Bank is independent, it’s in charge of managing the stability of the Euro system and bringing inflation down, so the decisions they make are independent of government,” Mr Varadkar said on Thursday.
“Obviously, it’s not going to be welcome for people borrowing and mortgage holders.
“I’m one of those people that gets that letter in the post a few days after the ECB makes a decision, telling me that the mortgage has gone up and we absolutely understand that this isn’t good news for people who have mortgages.
“But it will have other effects. It will help to bring down inflation for example, for pensioners it will mean a better return on their savings and I do think we need to bear in mind those aspects of interest rate policy.
“But also probably help to contain house prices and maybe even bring them down a bit for people that are buying for the first time.”
Mr Varadkar said there has been a prolonged period of low interest rates, which he said has now come to an end.
“Nobody wants to see interest rates going too high at the same time,” he added.
However, Minister for Public Expenditure Michael McGrath said he would not speculate on whether the interest hike will impact on house prices.
Speaking at the same event, Mr McGrath said he did not have a “crystal ball”.
“I’m not going to speculate on what direction house prices will go because it’s such an important issue for so many people who are looking to buy and people considering selling,” he added.
“We will leave those predictions too independent economists.
“An interest rate rise is obviously factored into the affordability assessments by lenders when considering how much they can lend to a first-time buyer or anybody else.
“It is clearly a factor but of course going the other direction you have the changes in the macro-prudential rules and the increase in loan to income multipliers.
“There are a whole set of variables that work into how much somebody can borrow and what the the price of a home is going to be.
“I’m not going to make any predictions in that regard. But an increase in the ECB rate will have a direct impact on tracker customers.
“We haven’t seen changes in variable rate customers so far and we have seen some lenders respond in relation to the fixed rate increasing.
“But I note from the most recent retail interest rate statistics, published by the Central Bank, that while Ireland has for a long number of years now been the second most expensive when it comes to mortgage rates, our relative position improved significantly in the last number of months to being the seventh or eighth most expensive now.
“Banks and other lenders will respond in the way that they see fit, but the ECB is independent.
“They do what they believe is necessary to get inflation under control and while there is pain for many, many people and businesses, it is in all of our interests that inflation is gotten under control because it is insidious.
“If inflation becomes embedded, and we started to chase it, we know that that is the road to ruin and so we have to get inflation under control.
“We will do what we need to do in terms of responsible fiscal management and then ECB will manage monetary policy and we just have to deal with the consequences of that by supporting people in the best way that we can.”
Asked if the ECB interest rate will wipe out all the budget day supports for householders, Mr McGrath added: “Not necessarily. It depends on individual circumstances.
“It depends on the amount of the loan balance that’s outstanding.
“Many people have signed up to fixed rate offerings and are now locked into the fixed mortgage rate for three years, for five years, or perhaps for up to 10 years and so they won’t be impacted whatsoever.
“It does depend on the individual circumstance but I acknowledge is is a fact that for many their mortgage is going up, and that’s going to be an extra burden on them.”
