Irish borrowers are being warned to prepare for an era of higher borrowing costs, as the European Central Bank gave the clearest signal yet that it will wind down its €30bn-a-month quantitative easing programme.
The ECB will debate whether to end bond purchases later this year at a meeting next week, the bank’s chief economist said yesterday – in a move that swept through financial markets sending bond yields higher and nudging the euro to a 10-day high.
The ECB has been propping up the European economy since 2012 with a mix of exceptional supports, including the quantitative easing (QE) programme and interest rates that have been held at all-time lows in order to encourage the flow of credit.
“Most people now expect QE to be done by the end of the year,” said Davy chief economist Conall Mac Coille.
The main impact will be rising interest rates, initially on the bond market where banks and some large corporations borrow, and eventually from the ECB itself, feeding through to retail interest rates and the cost of credit to business.
“If you have a mortgage you should be considering the possibility that your interest rate will go up in the next year or two,” Mr Mac Coille said.
Borrowers with tracker mortgages are most vulnerable to interest rate rises, though from very low rates, and are most likely to be in negative equity, he said. New borrowers with two- to three-year fixed interest rate loans can now expect to roll off those deals to higher variable rates.
The State, which has been able to borrow at interest rates of less than 1pc a year for 10-year bonds, is expected to see its borrowing costs rise. In the US, an earlier economic recovery and faster withdrawal of QE has seen borrowing costs for the government there rise to around 3pc a year for 10-year bonds – closer to historic norms than the rates now seen here.
The anticipation of higher interest rates, and the tapering of the QE market supports reflect the recovery in the eurozone.
Having revived growth with an unprecedented €2.55trn bond-buying scheme, ECB policymakers must decide when to end the purchases, as the threat of deflation is long gone and the bloc is on its best growth run in a decade.
While policymakers are in broad agreement that the purchases should end this year, ECB President Mario Draghi has avoided any formal discussion about winding down the programme, looking for more evidence that inflation is on a sustained rebound.
But comments from Peter Praet, a close Draghi ally, suggest that the ECB is pleased with the rise in inflation, raising the risk that a decision may come sooner rather than later.
“Next week, the Governing Council will have to assess whether progress so far has been sufficient to warrant a gradual unwinding of our net purchases,” Mr Praet said in his last remarks before the ECB’s next policy meeting, noting that it will be a “judgment” call.
Some analysts took the comment to suggest a decision is coming at the June 14 meeting but others saw it as the starting gun in a debate that will likely culminate in a decision in July.
But Mr Praet’s comments were a clear signal that when a decision is made, it is likely to be about gradually winding down the programme, as progress has been made in the ECB’s three inflation criteria. That could see QE extended from September but at a gradually reduced pace until year end.