FURTHER turbulence in the Irish markets is now anticipated after the Central Bank surprised investors by pushing up interest rates. The move will knock on to a rise in rates to borrowers, which will not be welcomed by the Government in the run-up to the expected calling of the general election.
The latest events have sparked strong Opposition criticism of the Minister for Finance, Mr Quinn, and have led to analysts questioning the direction of currency and interest rates policy.
The Central Bank move followed figures which showed an 18.6 per cent rise in borrowing from banks and building societies during March. The Bank is also believed to be concerned about the weakness of the pound, leading to strong speculation in the markets about a disagreement on policy between the Central Bank and Mr Quinn.
But last night a spokesman for Mr Quinn said talk of a rift between the Minister and the Central Bank was completely untrue. "The Central Bank informed the Minister that it needed to raise rates to control the growth in credit. That is its job and the Minister totally accepted that," he said.
Meanwhile, Mr Quinn also faced political criticism as the Central Bank hike is set to lead to a rise in bank and building society interest rates, which will hit borrowers, although benefiting savers. Opposition spokesmen also criticised the Minister for comments made a few weeks ago in which he said he would prefer a lower rate for the pound in The ERM.
The Fianna Fail finance spokesman, Mr Charlie McCreevy, urged Mr Quinn to "button his mouth". Mr Quinn, he said, had invited speculators to "have a go at the Irish pound".
Mr Michael McDowell, the Progressive Democrats finance spokesman, also criticised the Minister. "How can the Minister say that we are witnessing a planned currency shift, when, at the same time, the Central Bank has spent millions of pounds of taxpayers' money in an attempt to prevent that shift?" he asked.
The problems of the Government and the Central Bank in recent months have stemmed from the competing pulls of sterling and the deutschmark. Strong sterling has pulled the pound up against the D-mark but, in the run-up to the single currency, investors believe that the pound will have to fall closer in the ERM band to the deutschmark bloc.
This is what has led to the sharp fall in the pound in recent days. While this led to a rise in rates on the wholesale money market, the half-point hike in official interest rates yesterday took most analysts completely by surprise. Broad-based selling is now expected in both the currency and bond markets today and into next week.
Nevertheless, Mr Jim Power, chief economist at Bank of Ireland, said he was expecting a huge level of confusion over the seemingly inconsistent policies.
"This is proof that we are going to have a very difficult run-up to monetary union," he said.
Mr Power added that he expected international speculators to target the pound again either tomorrow or next week.
The pound lost further ground yesterday against sterling and the deutschmark. It closed at 91.8p against sterling from 92.48p and at DM2.5616 from DM2.5992 a day earlier. However, the selling was lighter than the previous day.
Nevertheless, money market rates continued to tighten. The Central Bank indicated in the morning that it would not allow rates to fall. But after its afternoon half-point hike in the short-term facility to 6.75 per cent, rates moved to over 7 per cent.
According to Mr Oliver Mangan, economist at AIB Capital Markets, rates are now unlikely to move below 6.75 per cent over the coming weeks. The key question, according to Mr Mangan, is whether the Bank is tightening rates to dampen down inflationary pressure, or to make it more expensive for the speculators to "short" the pound by borrowing money before selling it and hoping to make a profit.
"If it is the latter, it could come off quite quickly," he added.
(additional reporting by Maol Muire Tynan)
