Sharp fall in interest rates early next year

Rapid falls in interest rates are now expected as early as February. And recent moves in the markets point to significantly lower mortgages earlier in the New Year than many had expected.

Technical long-term Irish interest rates have fallen by almost three quarters of a percentage point in recent days and by almost a full point since the end of October.

The falls mean the market is now pricing in large rate cuts in February or March rather than May, according to Mr Vincent Dack, head of Treasury at BNP.

Mortgage rates are thus likely to fall in February and again by May next year. Borrowers can look forward to paying significantly less interest on many loans. However, the banks and building societies may not pass on all the gains to avoid squeezing savers too hard.

The size of the cut is not yet clear but is likely to be of the order of 1 per cent or 1.5 per cent to begin with. Someone with a £65,000 mortgage at 7.5 per cent over 20 years would save almost £40 a month after an initial one point cut and almost £60 on a 1.5 point cut.

According to Mr Dack the market's forward-looking indicators or forward rate agreements (fras) value Irish money in December 1998 at only 0.2 of a point above German rates - which are now at 3.3 per cent. "The market now feels there will be rate cuts and they will be before May," Mr Dack said.

Irish inter-bank rates are now at 6.25 per cent and according to Mr Dack will be below 5 per cent by May. The forward looking rates have fallen to 4.6 per cent and the direction is still downward.

Comments from Bundesbank Council member, Mr Edgar Meister, at the end of November that all the countries such as Ireland should take the initiative to lower their rates accelerated the moves.

Mr Dermot O'Brien, economist at NCB Stcokbrokers, sees the rate of decline accelerating in the New Year. But, he added, the Central Bank will not want to start cutting rates until the value of the currency has been decided. He is expecting a revaluation of the currency in February or March.

However, not all economist are agreed. Mr Padraig Garvey, economist at Riada, is less certain. He said the market is not yet convinced that rates will fall to around 4 per cent by the middle of the year.