Rates steady after German rise

Irish interest rates are still expected to fall over the coming months, despite a German rate rise and new figures showing a pick-up in inflation here. In a surprise move, the Bundesbank raised its key money market rate or repo rate by one third of a percentage point yesterday. While many in the markets had been expecting a German rate rise, few through it would come so soon or be so large.

The German central bank has now fixed the next two repurchase agreements at 3.3 per cent from 3 per cent, the biggest move in almost five years. However, it has kept its two official floor and ceiling rates at 2.4 per cent and 4.5 per cent respectively.

A number of other European central banks, including the French, Dutch and Danes, quickly raised rates in reaction, indicating the close policy co-ordination emerging in the run-up to monetary union.

In the past, an interest rate rise in Germany could also be expected to be followed here. However, interest rates here are well above German levels and, as rates across Europe must be the same when monetary union commences, Irish rates are still set to fall over the coming months.

Mr Jim Power, chief economist at Bank of Ireland, said he now expected the German repo rates to rise to around 4.5 per cent by the second half of next year. Irish rates thus have less far to fall to meet the German levels in the run-up to the single currency.

Market analysts believe that even the latest figures, showing an increase in the rate of inflation in September - when prices rose by 0.5 per cent from the previous month - will not spark an interest rate rise here, as the Central Bank's policy is now being dictated by the run-in to monetary union.

The monthly rise, the biggest since February, was mainly the result of a number of once-off factors. These included higher fuel prices, the end of the sales in clothing and footwear as well as higher VHI and creche costs.

According to Mr Power, this does not suggest that inflation is about to take off. "It will remain quite benign, although it has bottomed at this stage," he said.

Mr Jim O'Leary, chief economist at Davy Stockbrokers, said the only surprise was that food prices did not rise, even after falling in August.

"We can safely say that August inflation at 1 per cent was the trough and prices will not decelerate again," he said.

He added that the recent rise in beer prices would feed through next month and would also affect a lot of other groups.

Consumer prices have now risen by 1.5 per cent in the past 13 months. On an EU harmonised basis - which uses a slightly different method in calculating inflation - prices rose by 0.4 per cent in September and by only 0.6 per cent in the 12 months since September 1996.

The inflation figure should nevertheless mean that Ireland remains the EU member with the lowest rate.

However, one country did suffer a setback to its monetary union ambitions yesterday, with the resignation of Italian Prime Minister, Mr Romano Prodi, being seen as a setback to Italy's chances of qualifying. Editorial comment: page 13 See also page 9