Fixed rate falls suggest variable cut on the way

As you're reading this column, it probably means you have a vested interest in interest rates.

How they move will matter to you, as should any comments made by informed people on where they might be going. These sorts of comments tend to come in waves and we are currently right on the crest of a big one.

Over the past few weeks, lots of high-level talk about problems with the euro has brought the issue of interest rates into focus. The matter has been discussed in considerable detail, but may not have reached the ears of all mortgage customers as it may have been couched in economic speak.

Rumblings of discontent with the euro have been developing in a number of larger euro-zone countries, notably Italy. The argument of the dissenters is that the euro has not been good for their economy and, by extension, governments should return to national currencies.

The calls have received a greater airing than normal because of the rejection of the new EU Constitution in France and the Netherlands.

The European Central Bank, which sets euro-zone interest rates, has dismissed all these unhappy noises and their accompanying arguments as "absurd". The euro is not going anywhere any time soon, according to the ECB and a band of committed euro-zone finance ministers.

It remains true however, that the economies in the heart of Europe, such as Germany, France and Italy, have not been posting blistering growth of late. In fact, they are growing at about one-third the rate posted in the Republic, with the result that the one-size-fits-all interest rate that applies across the currency bloc has looked a little bit strange.

Interest rates represent one of the most important economic tools that governments have traditionally had at their disposal. They are raised when the economy looks like it is growing too fast and reduced when it shows signs of faltering growth.

It is for this latter reason that much of the talk of the past few weeks has focused on the possibility that euro-zone interest rates could be about to fall rather than rise as the ECB seeks to tackle problems in larger states.

This would make our mortgages even cheaper than they are now and could be expected to raise demand for borrowing at a time when traditional economic theory would call for higher Irish rates.

The ECB president, Jean-Claude Trichet, made one of his most stern statements on the whole issue late last week when he said cheap credit could not solve all of Europe's economic problems. Instead, the bigger European governments should do their bit to spur growth rather than relying on the ECB.

Just because Mr Trichet has done his best to sound firm, it does not mean the issue of interest rates has gone away. Few economists are now ruling out the possibility of a rate cut before the end of the year, whereas they had been expecting an increase.

This possibility should be used as background information for anybody considering a mortgage. It applies to all homeloan products, including trackers, variable mortgages and fixed loans. If you need proof, look at the fixed-rate cuts that have emerged from both EBS and IIB over the past week. While definite rules never apply, it is still safe to accept that lenders rarely cut their rates if they think the ECB is planning an increase. Watch that space.