Interest rate up .25%, maybe that interest only mortgage wasn't such a good idea?

whizzbang

now at 2.75% http://www.rte.ie/business/2006/0608/ecb.html

chump

whizzbang wrote:

now at 2.75% http://www.rte.ie/business/2006/0608/ecb.html

It's just the start I'd imagine. Does any of this make any sense (?... ), just thinking through it...
Inflation is rising faster than interest rates, so the ECB is gonna have to keep racheting up the rate - which in particular in ireland with our ridiculous debt, is going to increase inflation more, but then europe/(maybe our gov.) will step in and try to stop us increasing our wages to balance out the inflationary effect (because it will lead to more inflation, and leave us less competitive etc.), and this is going to make us relatively poorer... something to look forward to

miju

think alot of people we're reckoning on a 0.50% rise

chump

miju wrote:

think alot of people we're reckoning on a 0.50% rise

I think people thought there was maybe a 10% chance of it being .5% ... going by the odds available.

miju

interesting article in the indo today about the ECB , interest rates and them being behind the curve, anyone read it???? thoughts etc??

chump

ECB is 'behind the curve' on stifling irrational exuberance
Irish Independent, today

The ECB is raising rates another quarter, but some critics say too little, too late, fearing the inflation horse may have bolted already

OTMAR Issing sounded like a frustrated man. The former chief economist at the European Central Bank will not be presenting the economic analysis to today's meeting of the Governing Council, his term of office having expired last week.

It is pretty clear what he would have said. In a remarkable interview with the German newspaper Handelsblatt, published within days of his departure, Dr Issing made it clear that he thought the ECB was, in the jargon of the trade, "behind the curve".

Its "biggest mistake" had been to leave interest rates too low for too long. Dr Issing's credentials and position as head of the economics and research department had made him the most influential member of the ECB Governing Council, according to ECB-watchers. But clearly not influential enough to get what he wanted.

The Governing Council is made up of the governors of the national central banks, such as Ireland's John Hurley, and a six-person executive board, which included Dr Issing.

His department has been split up, with the replacement German member of the executive board, Juergen Stark, getting economics, but research going to ECB vice-president Lucas Papademos.

If this all seems a bit nerdy, remember that the decisions of the Council will determine what happens to interest rates. They are certainly going up to 2.75pc today, with a slight chance of a rise to 3pc. The burning question is how far and how fast they will rise thereafter.

The obvious interpretation of the changes to the executive responsibilities is that they make the ECB look more doveish about monetary policy. Dr Issing was seen as the u¨berhawk on the Council. Mr Stark is in the same mould, but will not be as powerful. Mr Papademos tends to be seen as on the side of the doves. President Jean-Claude Trichet wanted to make the Council more "collegiate", according to one analyst.

As usual, though, things can also be seen the other way round. It had been thought that Mr Stark would get a different position. The Bundesbankers managed to hold onto the economics portfolio when they had been expected to lose it. Perhaps it is really a win for the hard-faced German monetarists.

But, to judge from Dr Issing's comments, these have been Pyrrhic victories. The Council has not moved as fast and as far as he would have liked.

Bitter reversal

It is tempting to conclude that the surprise decision not to raise rates last month, when markets were pretty sure they had had a signal to that effect, marked a bitter reversal for the chief economist.

The other tempting conclusion is that the consensus about the next stage is correct: rates will rise to 3.25pc by the end of the year and stop there, with a chance that they might go no higher than 3pc, depending on how strong the economic data turns out to be.

That is still the best bet, except for one thing - all across the globe, the mood is changing.

Financial markets in rich countries seem to have stabilised after last month's bout of nerves, although long-term interest rates are still rising.

But there is something of a stampede from emerging markets and the risky assets to be found in them, and the even riskier financial instruments based on those assets.

In last week's report on the stability of the financial system, the ECB, while asserting that the eurozone's banking system is as sound as a bell, warned that the herd mentality of the wildly popular hedge funds could have the same disruptive effects as a bird flu pandemic, if the herd all headed for the exits at once. There is a danger that this is precisely what they are doing.

But why have so many investors taken such risks? This is where Dr Issing trained his Exocet. The Federal Reserve and the ECB have kept interest rates too low. With money earning almost nothing in dollars and euro, and stocks in a bear market, investors have had to hunt for higher yields.

Higher yields mean riskier investments. "Risk premiums have been so compressed that a lot of investors are no longer aware to the real risk they are taking on," Dr Issing said.

Well, you don't have to be in a hedge fund to know that. Living in Ireland is enough. One could not find a better description than Dr Issing's for much of the Irish investment in foreign property. With real interest rates the lowest in the eurozone, and the collapse of faith in the pensions industry, what else are they to do?

What really alarms Dr Issing - and no doubt others - is that the rot, as they would see it, is spreading fast. They would raise their eyes in horror, but indifference, at what is happening in Ireland and Spain. But across the eurozone, private sector credit rose 11pc in the twelve months to April, which is the highest figure since the launch of the euro.

Money supply growing at 9pc is way out of line with Bundesbank views on the causes of future inflation. The problem for the central banks is that, in recent years, the inflation has shown up in the price of property and other assets, rather than the consumer goods which they traditionally target.

There are those who argue that a good property boom, with a burst of extra consumption from happy home-owners, is just what the euro economy needs.

It was never an argument likely to find much favour in Frankfurt, but even financial markets are coming round to the ECB point of view.

They are worried about inflation, and they are worried about the risks to the financial system from property booms across much of the OECD.

Ten-year German government bonds were yielding 4pc last week. The ECB could have a freer hand to turn the screws than for many years.

Should it decide that it wants to stop the property boom in its tracks - as the Bank of England did in Britain - the screws could turn quite tight.

sapper

Where this is really going to start to hurt is not so much peoples ability to pay their existing mortages, but the banks inclinations to grant mortgages. Their main concern is peoples re-payment ability compared to disposable income, and in an upward-moving rates enviroment they are less and less likely to give out mortgages to marginal cases.

Some of the providers try and ensure that repayments are below 40% of a borrowers income. I think nowadays someone who is looking to get a mortgage that will cost them 41% of their monthly income will get knocked back, whereas that might not have been the case six months ago.

I think it's looking like 3.5% by the first quarter next year. Thats EUR200 a month extra over what people were paying yesterday. While they think they can handle the extra cost, I'm pretty sure the banks won't be....