Interest rates here to rise even though ECB won’t hike until 2022

Bank of Ireland doesn’t expect the ECB to raise interest rates until 2022, but reckons lending rates here are set to increase.

Pricing of longer-term mortgage deals, of five years or more, are tipped to increase most, Bank of Ireland chief financial officer Andrew Keating said yesterday.

The bank – along with its rivals in the Irish market – has cut rates for borrowers in the past year, but is now signalling a reversal. That reflects a higher cost of money on financial markets, where ECB interest rate increases in 2022 are now being priced in to bond deals, and is also based on a higher cost of capital for longer-term lending, Mr Keating said.

“I think they (mortgage interest rates) will increase from here,” he said yesterday.

Bank of Ireland shares fell as much as 8pc yesterday after a badly-received set of full-year results including reduced margins and a smaller than expected pre-tax profit for last year. The bank announced its first increase in total lending in a decade, however – to €77bn – even as CEO Francesca McDonagh warned that small and medium enterprises (SME) were holding off borrowing pending the outcome of Brexit negotiations.

That constrained borrower appetite creates an investment gap with European rivals, she warned. Despite the potential impact of the UK’s plan to leave the European Union, Bank of Ireland is “committed” to the UK business and will not cut lending to Irish SMEs, she said.

The bank reported underlying profits of €935m for last year, down from €1.08bn in 2017. However, it proposed an increased dividend to 16c per share, or €173m, for 2018.

The bank said a fall in its net interest margin (NIM), a standard measure of profitability, reflected competition in the UK where a strategic shift into higher margin business is under way and will include the sale of the bank’s credit card business. NIM fell to 2.20pc at the end of December, below analysts’ forecasts and down from 2.32pc 18 months ago. A further decline to around 2.16pc this year is now expected.

The revised outlook would likely lead Davy to cut its forecast for Bank of Ireland’s underlying profit before tax in 2019 by 5pc, with cuts in 2020 and 2021 also likely, the stock broker said.

In the mortgage market, Bank of Ireland said it had increased lending 17pc last year and taken a 27pc market share. New mortgage lending had also fed into a 21pc rise in business income growth as seven in 10 new borrowers opted to buy Bank of Ireland protection policies along with their mortgage after the bank streamlined the buying process.

In relation to tracker mortgages, Ms McDonagh said there were no new cohorts of borrowers the bank believes should be added to 9,700 previously identified cases. Asked about a group of around 200 bank staff and ex-staff who have formed a group to fight for trackers and to be refunded for claimed overcharging, she said she believed the bank had acted fairly.

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