Lower rates to boost property prices

The decision to cut interest rates was not a unanimous one among the 17 members of the European Central Bank governing council, according to president Wim Duisenberg. You can bet your bottom euro the Irish representative, Maurice O'Connell, was one of the minority arguing against the reduction.

The 17 governors are meant - like European Commissioners - to have eyes on goals loftier than pure national interests. But given just how inappropriate base interest rates of 2.5 per cent are for the booming Irish economy, Mr O'Connell must surely have put up the case for leaving interest rates on hold.

What level would interest rates be at, if we were not members of European Monetary Union? Given the strength of the economy, 8 per cent or more would be a fair guess.

Instead, an economy which on the evidence of this week's exchequer figures is continuing to boom is facing interest rates at a record low.

The main danger from lower interest rates is they will give a boost to already-soaring property prices. Borrowers have never had it so good and the prospect of yet-lower rates and, crucially, the outlook that they will remain low can only give another push to prices.

"This will totally negate any impact from the measures taken following the Bacon report," according to Mr Jim Power, chief economist at Bank of Ireland treasury.

Any benefit to young borrowers from lower interest rates is thus likely to be negated by yet higher property prices.

Traditionally, of course, it would be higher interest rates that would burst such a property bubble. Given that this will not happen now in Ireland, the most obvious development which could knock confidence in the market would be a sharp slowdown in economic growth.

As yet, this is not on the horizon, with most forecasters expecting a gradual slowdown in the economy. But forecasting is a hazardous business and all it would take, for example, would be a shake-out among some of our multinational employers to give a knock to economic confidence and growth.

Lower interest rates will also provide a boost for the economy generally, by making it cheaper for both business and personal borrowers to take on extra debt.

In the short term this could prolong the phase of extraordinarily-high economic growth now being experienced, while at the same time worsening the problems of skills shortages and congestion.

It is bad news for savers, with a further nudge down likely in terms of deposit interest rates as banks and building societies try to protect their profit margins as borrowing rates fall.

The ECB governing council, of course, had other things on its mind apart from the interests of one of its peripheral members. The decision to reduce interest rates by a full 0.5 of a percentage point shows just how concerned the bank is about the sluggish economic growth in France and Germany.

With the inflation rate in France and Germany running below 1 per cent, the bank is also mindful about warning of a Japanese-style period of stagnation or even deflation.

Reckoning that in most parts of the euro zone inflation was not a threat, an interest rate reduction was thus the smart move. And the decision to go for a cut of 0.5 of a point - as opposed to 0.25 of a point - was taken so that the markets would not be left, like a drinker in a pub after one pint, looking for a second in the near future.

Are euro interest rates now as low as they will go? They may well be, unless the big continental economies take another turn for the worse.

The ECB will hope for some signs of recovery in the months ahead, which in turn would lead to a firming of the euro in the foreign exchange markets.