Irish interest rate cuts look further away than ever, following strident remarks from a key Bundesbank Council member yesterday.

Mr Helmut Schieber, one of the permanent members of the Bundesbank secretariat and a directorate member for international relations, urged Ireland and Spain to keep rates at levels that will not spark inflation.

Mr Schieber, who makes few public statements, insisted that convergence of interest rates among countries likely to participate in the single currency could wait. Short-term interest rates across Europe must be the same by the time the euro comes into being next January, but the Bundesbank director was arguing that Ireland should be in no hurry to start reducing rates towards the levels in France and Germany.

He advised both Ireland and Spain to stick to their present monetary policy - that is higher interest rates than the core EU states - to reduce the danger of inflation.

Mr Jim O'Leary, chief economist at Davy Stockbrokers, said this is the most explicit statement about Irish rate policy made yet by the Bundesbank and is very akin to the Central Bank's own warnings a couple of weeks ago.

He added that the key one-month interest rate has risen above 6.5 per cent over the past week, as the market pencils in rate cuts later than they had earlier expected.

"Under normal circumstances we would now be talking about the possibility of mortgage rate rises," he noted.

"But now we have to assume that the banks and building societies will not raise rates knowing that they will have to cut them again at the end of the year."

Mr Mick Osborne, treasurer at First National, said banks and building societies are unlikely to even look at rate rises, although under other circumstances they would now be under discussion. He added that he is expecting the first rate cuts in May to be followed by even more in August.

According to Mr O'Leary the pendulum has now swung from a belief that rates would be cut in April and would have fallen the full 2.5 to 3 percentage points by autumn, to the belief that most of the cuts will happen in late autumn.

But, he added, rate reductions are likely to come faster than the market is currently expecting. This would rid the system of its "most potent, visible and embarrassing emblem of real economic divergence" namely sizeable differences in short-term interest rates. It would also help to ward off currency speculation between May and December, he said.

According to Mr Eoin Fahy, chief economist at Ulster Bank, gradual interest rate cuts are likely from June onwards.

"Although the Central Bank says it wants to delay cuts for as long as possible, it has acknowledged that it must operate within the inevitable constraints which movement to monetary union entails."

He added that co-ordination between different central banks will be enhanced from June and significant pressure may be placed on the Central Bank to start convergence. "This means it is unlikely that delays in cutting rates will occur," he added.