Recent weeks have seen short-term interest rates rise in the US and the euro zone and further rises in British interest rates are already discounted by the market.

Bond yields have risen in tandem with the rises in short-term interest rates and 10-year bond yields in the US are now as high as 6.5 per cent (see table). Somewhat anomalously, the ultra-long end of the bond markets (30-year bonds) in the US and UK have actually seen some recent declines in yield. This has been primarily technical and reflects the fact that falling public sector deficits in both countries are enabling the authorities in these markets to redeem long-dated paper.

The key factor underlying the upward pressure on short-term interest rates continues to be the phenomenal strength of the US economy. US economic growth in the fourth quarter of last year actually accelerated and this momentum seems to have carried forward into the first quarter of 2000. It is now highly likely that the US Federal Reserve will continue to raise US short-term interest rates in order to reduce the economy's torrid pace of growth.

Higher US interest rates have transmitted upward pressure on euro interest rates through the mechanism of the exchange rate. The well-publicised plunge in the euro to below parity against the dollar was clearly a key factor in the recent rise in European interest rates. While the improved performance of the European economy would have justified increased interest rates later in the year, there is little doubt but that the strong dollar forced the hand of the European Central Bank.

The situation in our nearest neighbour - and still our largest trading partner - is akin to that of the US. Sterling has been very strong reflecting a robust British economic performance. Despite protestations from industrialists, UK industry seems to have learned to live with the high sterling exchange rate. Continued strong economic growth and rising house prices suggest that the Bank of England will progressively raise UK interest rates to choke off nascent inflationary pressures.

So far this environment of rising interest rates has had no effect on the Irish economy, but has certainly had a negative impact on the Irish stock market, particularly the financials. Higher interest rates are clearly appropriate for the Irish economy but the rises so far, combined with further modest rises, are unlikely to be sufficient to bring the economy back to a more moderate pace of growth.

However, the contrast between the real economy and Irish banking stocks could not be starker. Bank shares are now only worth approximately 50 per cent of their value of early last year, despite the fact that their profits continue to benefit from the booming domestic economy.

Analysts have put forward several reasons for this weakness including declining profit margins because of greater competition and selling by domestic institutions due to their policy to diversify their portfolios post the introduction of the euro.

A possibility that has yet to receive much attention is that the current weakness in bank stocks is itself an early warning signal that the overheated Irish economy is about to come to a shuddering stop.

A slowdown in growth, if it occurred suddenly, would in all probability lead to an increase in bad debts, which would have the potential to dent the banks' profits severely. For now this interpretation of weak Irish bank shares can only be speculative and the jury will remain out on this issue until signs that the economy can achieve a soft landing emerge.