Most people fear that anti-inflation measures by raising interest rates will actually make them worse off


Most people think that the European Central Bank’s (ECB) moves to aggressively raise interest rates to fight inflation will make a bad situation worse.

Existing borrowers fear their repayments will increase, while homebuyers expect rising borrowing rates to make it more difficult for them to buy a home.

And a quarter of people even fear that higher interest rates will trigger an economic downturn, according to KBC Bank’s latest August consumer sentiment index.

Overall, 69 percent of consumers expect their personal financial situation to be adversely affected by higher ECB interest rates.

Only one in 20 consumers believe that the European Central Bank’s rate hikes will improve their financial situation by leading to lower inflation.

The ECB raised interest rates by 0.5 percentage point last month and warned of more interest rates as it seeks to curb inflation, which pushes up the cost of living.

A separate question asked as part of the monthly sentiment poll concerned the ECB’s hikes. One in four consumers worried that higher interest rates could cause an economic downturn.

The survey also found that one in five consumers expect higher borrowing costs.

According to data from the 2016 census, around a third of households have a mortgage. Half of that is fixed rate, according to the central bank.

Economist Austin Hughes, who compiled the KBC survey, said consumers now fear higher borrowing costs as their fixed-rate mortgage terms expire.

In addition, consumers fear higher borrowing costs for their non-mortgage loans.

Concerns about rising borrowing costs are widespread among 35-54 year olds and Dublin-based consumers.

And one in six thinks it will become more difficult for them to buy a house. This reaction was most common in 25-34 year olds but also increased in 35-44 year olds.

Mr Hughes said this reflected the potential for affordability to fall significantly among prospective buyers, or approaching the margin where homeownership may no longer be possible.

Others worry that the value of their investments could fall.

Mr Hughes said the responses were more negative than expected.

“Broadly speaking, there is a strong feeling that higher interest rates could significantly worsen a bad situation in the coming months,” he said.

Mr Hughes said the KBC Sentiment Index shows just 1 per cent of consumers see higher interest rates improving their home buying prospects.

“So the prevailing sentiment is that in an Irish property market currently characterized by pent-up demand and problematic supply due to cost and capacity constraints, higher ECB interest rates will mainly limit individual access to home ownership by hampering affordability, rather than to help calm overall real estate market conditions,” he said.

A number of economists are skeptical about the wisdom of the ECB’s rate hikes.

This is because, unlike previous inflationary periods when excess demand was a problem, this time prices are mainly being pushed up by supply shocks, which were focused on energy and food rather than excess demand.

Few consumers expect banks to hike interest rates on savings accounts after ECB rises.

Meanwhile, Irish consumer confidence weakened marginally for a sixth month in seven in August, as also shown by the KBC Bank Consumer Sentiment Index.

But it was a limited change in the index. The index fell to 53.4 in August from 53.7 in July.

This brought the index to its lowest level since October 2020 when it hit 52.6.

The August reading is well below the long-term series average of 86, suggesting a relatively gloomy Irish consumer at the moment. Most people fear that anti-inflation measures by raising interest rates will actually make them worse off

Fry Electronics Team

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