ECB raised interest rates, as expected

As we expected the European Central Bank raised interest rates by a quarter percentage-point today - it brings benchmark rates to 4.25 per cent, the highest since September 2001. The ECB acted because euro-zone inflation rose to 4 per cent last month, while the bank's medium-term goal is just over the 2 per cent mark.

Based on this borrowers would see their monthly repayments increase: by roughly €15 for every €100,000 borrowed on a 20-year mortgage, and around €16 per €100,000 on a 30-year term.

This presumes that lenders will pass-on the increase, in-full, to mortgage holders. Although this is the most likely scenario a strong case could be made for restraint and imagination by the banks.

A phased-in increase would unquestionably hurt their profit-margins in the short-term but I'd say look at the longer-term, weather this storm and facilitate a speedier return to profitability.

There are already some very stretched borrowers around who need another month or two to grieve for the times they naively thought were rock-solid and to adjust for increased costs with scaled-down lifestyles.

While 0.25% may sound small it will be read in the context of a further 0.25% looming in the wings for next quarter. An unwise move now could prove to be the straw that broke the camel's ailing back - it would be hara-kiri to trigger a wave of repossessions which would serve to tear the value off the thousands of properties the banks, in reality, own.

Not only that but it would the economy's recovery on ice for at least a further 12 months ..and by recovery I mean a return to sustainable levels of borrowing (ie. increased turnover for the banks). However what makes this difficult to balance is that even before today's increase they were already borrowing at much higher levels to service their own debts.

While staggering or passing-on a smaller increase (by narrowing the margin-of profit they add to the ECB base-rate) may appear to counter-act the ECB's action against inflation I'd hedge my bets that that cloud hanging over-head would have the desired effect of slowing spending down ...take note credit-card addicts!!

If I were Brian Cowan that's the argument I'd have put to the bank chiefs last week. I might also have phoned my buddies in IRISH INDEPENDENT NEWPAPERS and told them to keep pushing the 'things are getting bad' line in a further effort to cool-down spending.