Just as the ECB is taking away our much-needed cash, governments should give it back

Ouch. And again ouch.

Last Thursday, the European Central Bank (ECB) confirmed our worst expectations by raising its key policy rate — the rate that drives tracker and adjustable-rate mortgages — by a whopping three-quarters of a percent.

The move came after a half-point rate hike in July.

Let’s put that in context: During the last ECB interest rate hike phase – between September 2005 and July 2007 – ECB interest rates rose from 2.0 percent to 4.25 percent

That rise of 225 so-called basis points (a fancy word for two and a quarter percent) over almost two years is offset by a rise of more than half that magnitude in just three months.

Assuming a standard mortgage of €300,000 with a remaining term of 15 years, the last increase means an increase in monthly payments of around €100.

During the last phase of interest rate tightening, inflation was 2.6 percent and is expected to rise to just over 3 percent in the absence of corrective measures by the ECB.

Eurozone inflation is now four times above the ECB’s benchmark.

Having hiked rates by 125 basis points so far this year, the ECB is likely to hike at least another 100 basis points and possibly 200 and do so by the end of 2023.

This is causing the government a major headache in the run-up to the next parliamentary elections.

Where the policy decisions of a previous government can backfire on the current government.

In fairness, the ECB did raise interest rates between 2005 and 2007, but did not lower them by an even larger amount – a total of 375 basis points – during the Great Financial Crisis.

But when the ECB gave up – increasing average disposable income by about €400 a month between 2008 and 2013 – a package of fiscal austerity measures, totaling about €11.6 billion, withdrew.

The drastic reduction in mortgage interest relief was a case in point. This action was falsely justified as an attempt to correct an error that led to Celtic Tiger property prices.

As we now know, higher taxes did not prevent a return to these price levels and were therefore not a causal factor in the first place (a credit glut, not low taxes, was to blame).

But fueled by an ideological penchant for tax increases (and perhaps some self-interest as net recipients of generous government-funded salaries and pensions) some have spun a narrative that, rather than being a simple case, not taxing family income in this way serves to Servicing the mortgage on the family home – Mortgage tax breaks were a form of tax bounty squandered on irresponsible real estate magnates.

In terms of poor housing, the argument made no sense. But it caught on with government and remains a major cause of frustration in central Ireland to this day.

When the government has been too hard on taxpayers, central banks have been too lax on borrowers.

In my 2009 book back from the abyss, I welcomed the ECB’s policy of quantitative easing, but warned that as global growth recovers, central banks must – cautiously and with clear forewarning – restore normality to interest rates.

However, despite strong growth in the US and eurozone economies between 2014 and 2018, this did not happen.

Incidentally, it was disappointing to see then-Fed Chair Janet Yellen unchallenged on this issue when she spoke at an economics conference in Dublin last December.

Now central banks are belatedly correcting past mistakes.

But nine tricks are needed because one trick was not taken in time.

Instead of interest rates gradually rising between 2014 and 2018 (as they did between 2005 and 2007) during good times, central banks are now proposing a much more damaging pace at a time when borrowers and households are least able to cope.

After the ECB took away (2008-2013), the government must now give while the ECB takes back: a restoration – albeit partial – of mortgage rate support could be crucial to keeping tens of thousands of families indoors.

The local wealth tax – a tax Fine Gael had promised to abolish – also needs to be taken into account.

In a country where secure rental property is affordable, a home ownership tax may be justified.

But in Ireland, for the most part, rented family accommodation is unaffordable if not unavailable and unsafe.

The taxation of the family home is therefore not a tax on wealth, but a tax on a vital necessity.

And while in a country where rate hikes have limited impact on the economy (like Germany, where interest rates are largely fixed), budget support for households can focus on fuel and electricity prices.

But Ireland is not such a country.

As we face a double whammy of inflation and rate hikes, we need a two-way government response.

Marc Colman is a former economist in the Monetary and Fiscal Policy departments of the European Central Bank. He currently heads the consulting firm Octavian Economics

https://www.independent.ie/business/irish/as-the-ecb-taketh-away-our-much-needed-cash-so-governments-should-give-it-back-41977303.html Just as the ECB is taking away our much-needed cash, governments should give it back

Fry Electronics Team

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