July 16th, 1982

Mon, Jul 16, 2012, 01:00

FROM THE ARCHIVES:Charles Haughey’s scandal-prone government in 1982 was suspected of manipulating the Dublin money market after a surprise drop of 1 per cent in the Central Bank’s short term facility rate brought the interbank rate down to 17.5 per cent. Ken O’Brien reported on the consequences for mortgages and the rumours of what lay behind the move. – JOE JOYCE

The chance of a fall in Associated Bank interest rates, and an easing of upward pressure on the building society mortgage rate, increased yesterday following a Central Bank move to cut its short term credit facility rate by 1%.

The Central Bank cut effectively institutionalises the fall in interbank rates of more than 1% that has occurred [sic] in the past week.

The new rate of 17½% ensures that rates at the short end of the money market will stay below this level for the time being.

But the cut has not removed fears that building society rates may increase when the minister for the environment meets the societies next Thursday – two days after polling in the Galway East byelection.

The societies have pressed a very strong case for an increase, and it is not certain that the promise of a possible fall in Associated Bank rates will be enough to gain their agreement to freeze the [mortgage] rate at the present level of 16¼% or minimise an increase. However, the minister may be able to use the fall in interest rates to persuade them to agree to another postponement.

The societies have argued for a 1.7% increase in the mortgage rate, which would bring it to a record level of 17.95%. On the basis of present money market interest rates there is now scope for a fall in Associated Bank rates of ½% or more – but this would not be enough to eliminate the need for a building society increase entirely.

The only cloud on the interest rate horizon is forthcoming VAT payments due in the coming week. The payments will drain about £55 million from the market and may cause a hiccup in rates. In the longer term the accelerated VAT move could push interest rates up further.

The fall of over 1% in interbank rates has been a source of some puzzlement in the money market in recent days. There has been speculation to the effect that it is politically motivated.

The improved liquidity in the market has been attributed to a substantial increase in disbursements from the exchequer. It has been noted that these outlays occurred after June 30th – the final date for the half yearly exchequer returns which showed a current budget deficit of £692 million.

By holding up exchequer payments until July it was possible to keep the half yearly deficit below £700 million. The bank’s policy could indicate a change of sentiment on its part about the need for high interest rates. The bank had indicated it would, if necessary, resort to the interest rate weapon if it was dissatisfied with the trends in the public finances.

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