“There is little prospect that the European Central Bank (ECB) will raise interest rates in 2021 or 2022 and it seems unlikely that it will raise rates in early 2023,” said Austin Hughes, chief economist with KBC Bank. “The [European] economy is in rebound [after Covid] but we are still in a deep economic hole and we’ve still some significant way to go until recovery.” he said. “The ECB is trying to ensure that recovery gets going – but borrowers should prepare for at least the possibility of higher rates later in 2023. Noise around higher rates may become a lot louder next year and borrowers need to look ahead.”
When could European interest rates start to rise?
Economist Jim Power believes interest rates could start to rise in late 2022 “provided virus variants do not blow the [economic] recovery off track”.
How high could rate rises be?
“By the end of 2022, the ECB’s main refinancing rate could be 0.25; by the end of 2023, it could be 1.5pc,” said Power.
The ECB’s main refinancing rate, which is currently at zero, has a direct impact on the mortgage repayments of borrowers with tracker mortgages and it also often affects the cost of variable mortgages.
The ECB is unlikely to increase interest rates at an alarming rate – if it does raise rates in late 2023 or early 2024, according to Hughes. “However, little would be achieved by moving only once,” he said. “So, I expect a short sequence of small moves over an 18- to 24-month timeframe, perhaps totalling [an increase of] around one percentage point,” he said.
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Could anything push rates higher and earlier than expected?
Inflation will be the key driver behind any ECB moves to raise rates, according to the independent economist Alan McQuaid. “The ECB’s principle mandate is price stability and if inflation starts to pick up, then it will be faced with a dilemma,” he said. “Inflation has started to rise across the globe.”
The ECB is unlikely to increase interest rates this year or in 2022, according to McQuaid.
Although central banks have argued that recent inflation is transitory, some economists believe that sustained higher prices will be a hangover of Covid.
“Therefore, the ECB could find itself in a situation where inflation starts to pick up on a sustained basis, which would require the central bank to raise interest rates sooner than it wants to,” said McQuaid.
“On the basis that inflation proves to be stickier than the ECB is assuming, we could see a 0.25 percentage point increase in rates in 2022 (bringing the main refinancing rate to 0.25pc by the end of 2022) – and another 0.5 percentage point increase in 2023 (bringing the main refinancing rate to 0.75pc by the end of 2023),” said McQuaid. “Over the next few years, I don’t see the ECB’s main refinancing rate being any higher than 2pc. Even though a 2pc main refinancing rate would still be low by historical standards, a 2 percentage point increase in rates could do an awful lot of damage to many consumers and businesses trying to pick up the pieces post-pandemic.”