Fresh round of interest rate cuts imminent

 

Irish borrowers may see their repayments reduced again this week as the Central Bank comes under pressure from its European partners to reduce interest rates.

The bank could cut as early as this morning, but most economists say it will wait until after an important meeting of the European Central Bank (ECB) tomorrow, or longer.

Irish rates are currently the highest of the 11 currencies that will form the euro in January; the key repo rate is expected to fall from its current level of 4.94 per cent to the current German rate of 3.3 per cent.

Meanwhile, Germany's new Finance Minister, Mr Oskar Lafontaine, has hinted he would not object to even lower rates in the future, arguing that the ECB should be as concerned about unemployment as inflation.

The Irish Central Bank fears that lower interest rates would propel inflation, which is already running at more than double the €11 average. Speaking on RTE radio yesterday, the governor of the Central Bank, Mr Maurice O'Connell, said he was especially concerned about soaring house prices.

"Given a choice at the present time, obviously we would hold rates rather than reduce them," he said. "It's not the best thing for the Irish economy at this time, but if you're a small country you often have to live with the preferences of other people, bigger people."

With the repo rate for the week set each Monday, Mr O'Connell could order another cut this morning. Last week, Italy cut its rate by one percentage point, leaving the Republic's high rates somewhat exposed. But a move this morning would give Irish officials an advantage when facing criticism from their partners at the ECB meeting.

But given the concern about inflation, the Central Bank may wait for a new batch of inflation figures due on November 12th before moving. Some analysts now believe the latest batch of inflation figures will actually show a drop. This would give the Central Bank the perfect opportunity to cut rates without being open to the charge of fuelling inflation.

Mr Lafontaine has said the new ECB should look more towards the policies of the US Federal Reserve than the Bundesbank and play an active role in promoting economic growth and jobs.

Analysts interpreted his emphasis as a signal that the German government would not object to lower interest rates to stimulate investment, even if such a policy risked pushing inflation higher.

"Alan Greenspan, head of the American central bank, has shown that both things are possible," Mr Lafontaine said.