Higher interest rates now seem inevitable

AN increase in bank and building society interest rates now appears inevitable, as wholesale interest rates continue to indicate a rise.

In the absence of an increase in the Central Bank's official interest rate, the main financial institutions are not likely to increase rates immediately, but unless money rates ease back they are bound to pass the rise on to borrowers before long.

The key one month rate continued to trade over 5.5 per cent yesterday and with no move by the Central Bank to put money into the market, analysts are increasingly convinced that the Bank wants to see a rise in retail interest rates.

The Central Bank has not, however, increased the key short term facility rate at which it lends to the banks, which would be a clear indicator to the market that it wants to see higher costs for borrowers.

Meanwhile, on the currency markets, the pound fell back slightly against sterling, but remains above 104p sterling, leading to fresh warnings from manufacturing exporters and from the food sector.

Dealing in the Dublin money market was relatively quiet yesterday, but with the key one month rate continuing to trade above 5.5 per cent - it closed yesterday around 5.65 per cent - sources in the main financial institutions believe it is only a matter of time before borrowing and deposit rates increase. Mr Austin Hughes economist with Irish Intercontinental Bank, said a modest rise in retail rates was in prospect. He also warned that the move to EMU could further disturb money markets in the months ahead and could lead to further rises in interest rates.

Higher money market rates will put pressure on profit margins of the main financial institutions because it will increase their cost of raising funds. However for competitive reasons none of the banks and building societies is likely to want to be the first to move, particularly as the Central Bank has not increased its official rate. Market sources believe that if money market rates stay where they are moving into next week, then a rise in rates is nonetheless likely to go ahead.

Mortgage rates are likely to rise by up 0.5 of a percentage point, while other borrowing rates will also increase. Depositors should get a higher return, although the financial institutions may try to increase deposit rates by less than borrowing rates in a bid to boost the margins on their core businesses.

Speculation about higher interest rates has helped to support the pound on the foreign exchange markets and under pin it above 104p sterling. The Bank of England report calling for higher British interest rates helped sterling yesterday and the pound slipped back slightly to close at 104.12p sterling from 104.35p the previous day.

The high pound exchange rate and the prospect of higher interest rates is worrying the food sector, according to the Irish Co Operative Organisation Society (ICOS). Irish food exports to Britain stood to suffer greatly, according to Mr John Tyrell, director general. ICOS is calling for measures in the 1997 Budget to help the sector including reductions in employers' PRSI and corporation tax.

The industry exports substantial quantities of cheese, meat and mushrooms to Britain, ICOS points out, and the rise of the pound against sterling is seriously affecting competitiveness and means it is "increasingly difficult to retain Ireland as an investment base for the food industry.

Meanwhile the Small Firms' Association again called on the Central Bank "to take immediate action to allay fears of an interest rate hike", saying that there are 65,000 jobs dependent on the British market.