How far and how fast is the Central Bank's main interest

One of the biggest questions facing Irish policy-makers as they prepare for monetary union is how far and how fast interest rates are likely to fall in the run-up to January 1st, 1999.

One of the main assumptions behind our wish to join up is the boost we would get from lower interest rates. It has always been assumed that Irish rates would have to fall to German levels by the first day.

But last weekend's meeting of EU finance ministers and, indeed, events over the past few weeks may have altered this assessment. Many commentators now believe that Irish rates will have fallen to the German levels by May - the date that has now been set for the announcement of which countries will be in the euro and the rates at which their currencies will be locked together.

The other recent shift is the feeling that German interest rates are on their way up.

In the not-too-distant past, a rise in German interest rates would almost automatically be followed here. But this time around that is very unlikely. A German rise would now be seen as an opportunity to narrow the difference between Irish and German rates, so we would have less far to fall next year.

Whether there would be a fall in interest rates for borrowers here before Christmas is an open question. However, it is very unlikely that the Central Bank would willingly allow rates to fall before they have to. The Bank is likely to be hoping that a very gradual fall over the beginning of next year - followed by a more significant shift after May - would be the order of the day.

The difficulty is that we are now in completely uncharted waters. And one of the main influences on when we would see the first interest rate cuts will be trends in the currency market. The simplistic argument has been that speculators would pour money into the Irish pound if rates here next May were significantly higher than in Germany, in search of a higher return. While this would drive Irish interest rates down quickly it would push the currency up and so there would be tensions in the system.

In these circumstances the Central Bank could intervene and push interest rates all the way down to German levels in a matter of days or possibly weeks. However, it is likely to want to be a lot more confident about trends in borrowings from banks and building societies and the housing market before it would take such a big chance.

Up to May, the Bank is putting its hopes on continuing uncertainty. The thinking goes that if the markets are uncertain at what rate we will join, then they cannot take the risk of a large exposure. The authorities here retain the choice to order a revaluation of the pound's central ERM rate, right up to the meeting of the main EU Council in May. They are hoping that because they will remain able to do this, interest rates here will not converge completely with continental EU rates in advance of that date.

In addition, there is not even any certainty yet about which method would be used to convert the various currencies, although central ERM exchange rates appear to be the likely choice.

Of course an early revaluation of the pound's central ERM rate would change the game and introduce an element of certainty into the proceedings. However, it is unlikely that this is what the authorities want. A revaluation would lead to lower interest rates more quickly. However with asset prices, rather than consumer prices, proving more inflationary at the moment, there is a good chance that the Central Bank would prefer to keep interest rates higher and allow the currency to slip.

Whatever happens, Irish interest rates seem virtually certain to fall next year. They may not fall as far as many predicted earlier this year and, with German rate rises on the way, an overall fall of around 1 percentage point may be in prospect.

The Central Bank will be hoping it manages to keep control of the situation. But whether this will be possible will only become evident as the pace hots up in the New Year.