Lower rates likely after US, German cuts

AN early reduction in Irish interest rates looks increasingly likely, following a bigger than expected cut in German wholesale rates. The trend to lower interest rates internationally was reinforced last night when the US Federal Reserve Board cut its key interest rates by 0.25 of a percentage point.

The Bundesbank reduced its key money market rate - the securities repurchase tender by 0.15 of a percentage point to 3.40 per cent yesterday morning.

This has increased speculation of an early reduction in the official Bundesbank rates which would probably knock on to Irish rates.

Meanwhile, last night the Fed cut the funds rate for overnight lending from 5.5 percent to 5.25 per cent in an effort to support weakening economic growth and guard against recession. The Fed also reduced its main discount rate by 0.25 of a point to 5 per cent, the first time it has cut this largely symbolic rate since July 1992.

Irish Intercontinental Bank economist Mr Austin Hughes predicted yesterday that, with the Bundesbank now likely to make cuts in its official rates, the Central Bank here will also allow interest rates to fall.

While the Bundesbank's fortnightly meeting today may appear too soon for a cut, Mr Hughes believes that German official interest rates will inevitably fall over the next month. The Bundesbank is likely to opt to allow official rates to fall by as much as a half of 1 per cent, he says, forecasting a similar reduction in Irish interest rates at that time.

Rates on the Dublin money market eased on the back of the Bundesbank announcement. Key one month money market rates - the rate at which mortgage and bank lending rates; are set - traded slightly lower at just over 5 per cent.

Dealers have indicated that this rate would have to fall below 5 per cent to warrant any cut in mortgage and bank lending rates. A further reduction in these rates could clear the way for a small cut in bank and building society rates, even before a Central Bank move. However, the Central Bank is likely to support rates above 5 per cent for the moment.

Also, financial institutions are warning that with deposit interest rates at historic lows, the scope for further cuts in lending rates is limited.

With economic growth remaining robust, the Central Bank might prefer to avoid another fall in interest rates. However, the Irish authorities' desire to Ireland's position within the EMS as stem the pound's rise against sterling, makes it likely that the Central Bank will almost immediately follow the Bundesbank in cutting rates, Mr Hughes believes.

The Bundesbank's decision to step up the pace of cuts in its main money market interest rate yesterday triggered a parallel easing in Belgium and increases the chances of a further French interest rate cut.

The move appears to underline the Bundesbank's concerns about the state of the German economy and the increasing trend among German companies to invest overseas.

The downward trend in interest rates was Fed saying in a statement that with price and cost trends already subdued, a slight easing of monetary policy is consistent with contained inflation and sustainable growth". The move had been widely expected on Wall Street.

The latest economic figures from the US point to moderate growth and low inflation. Retail sales rose by just 0.3 per cent in December while producer prices rose by 0.1 per cent in the same month, when volatiles food and energy costs are excluded. The Fed funds rate has now fallen three times since last July by a total of 0.75 of a point.