Interest rates will rise – but how high will they go?

There is little doubt now that interest rates are heading higher. Increases are already underway in the UK and US and markets expect the ECB to move before the end of the year. The only thing which might stay the ECB’s hand is if the euro zone economy collapses into recession. For now, with inflation rates heading sharply higher, all the signs are interest rates are rising too. But a vital question for borrowers is how high they will go.

1. Great expectations

Market expectations of the extent of likely interest rate rises have jumped sharply in recent weeks. Having started the year at around 0.3 per cent, the State’s 10-year interest rates – a key indicator of the price of borrowing – are now close to 1.4 per cent. Government bond interest rates have risen internationally, though the spread or gap between Irish interest rates and those in Germany has widened a bit – and Italian and Greek rates have risen much more sharply again.

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