A CUT in key interest rates by the Central Bank may be imminent, after the Bundesbank signalled a further cut in German wholesale rates, according to building societies and dealers in Dublin.
The cut in the Irish STF, or Short Term Facility, from 6.5 per cent to around 6.25 per cent is "imminent", said Mr Vincent Dack, head of treasury and capital markets at Banque Nationale de Paris (BNP) in Dublin.
"They probably will correct the STF. It is so far out of line with money market rates at 5 per cent that it is a bit irrelevant," Mr Mick Osborne, treasurer at First National Building Society said.
"The Central Bank could cut by up to half of a point if it wanted," he added.
But the move, which more optimistic analysts believe could happen as early as today, would have no direct impact on interbank rates and would not lead immediately to a cut in retail interest rates. "It would simply give the authorities the chance to grab a few decent headlines," Mr Dack said.
But good news could also be on the way for mortgage borrowers, with the one month rate trading around 5 per cent and even dropping below that level briefly yesterday.
It is this level which is seen as the key for retail rates generally.
"If the one month trades at or below 5 per cent for around a week, retail rate cuts of a quarter point would probably follow," said Mr Osborne. "Particularly if we get a signal on the STF."
The problem, said Mr Osborne, is reluctant to cut rates further as their margins are already tightly squeezed with interest rates on deposits at historic lows.
However, the banks and societies are also in serious competition to win new mortgage business. This means "if one cuts they wills all have to follow", Mr Osborne said. The falling interest rate trend across Europe also poses a dilemma for the Central Bank. It may also be reluctant to see rates fall, with economic growth still forging ahead and the risk that yet lower rates could fuel inflation.
"The Central Bank knows rates will be coming down by the end of the month. If the banks go for permission to cut retail rates, it may think there is little point resisting the inevitable," one trader said.
But others are not so optimistic. "The Central Bank will wait for an official rate cut from the Bundesbank in two weeks' time," said Mr Jim Power, chief economist at Bank of Ireland Treasury. "They will not want to be seen to lead, they would prefer to follow."
Mr Power believes that the further cut in the German repo rate announced yesterday points to a "strong likelihood" of a cut in its key Lombard and discount rates when it meets again in two weeks time.
Others believe the German central bank may prefer to wait four weeks - until February 29th - when it will have seen January M3 money supply figures.
"My money is on February 29th," Mr Dack said.
A German rate cut would almost inevitably lead to a similar cut in Irish interest rates, given the Central Bank's desire to maintain the pound's position in the EMS and to stem further gains against sterling.
A slightly smaller than expected rise in private sector credit of 11.1 per cent announced yesterday also underpinned the markets and adds weight to rate cut arguments, Mr Dack said.
