A report from Ulster Bank has said long-term interest rates are set to rise from 'record and unsustainable lows', with the ECB most likely to raise rates in the next six to nine months.
In its July report, the bank's financial markets strategist Niall Dunne said a series of unprecedented events had driven long-term fixed rates to historic lows. He said mortgage borrowers could now fix at rates lower than the average variable rates.
Mr Dunne set out three possible scenarios for rates in the second half of this year, all of which see long-term rates rising.
In he first, he said that if the market's perception of the euro zone's political stability had suffered as a result of the EU constitution referendums, long-term rates would rise.
Under the second, the report looks at the possibility of a euro zone rate cut before year end. Mr Dunne said that if a cut were made, the market would grow more optimistic on the euro zone's future growth prospects, again leading to higher long term rates. Dunne, however, sees no more than a 15% chance of a rate cut this year.
In the third scenario, the economist argues that the ECB will raise long-term rates in the next 6-9 months. 'The euro zone's money supply has been accelerating on average at 6.6% over the past three months, far above the ECB's stated tolerance of 4.5% annual growth. The inflation targeting ECB is nervously watching for second round inflation effects arising from increased liquidity, and would undoubtedly hike rates if data releases improved even fractionally,' said Dunne.
