The Central Bank is coming under growing pressure to reduce interest rates to the levels prevailing across the rest of the euro zone. September inflation figures, due for release later today, could pave the way for the first rate cut.

A benign set of inflation data, allied to the recent fall in sterling and the decision by the Spanish central bank earlier this week to cut rates, would create a favourable environment for the bank to reduce Irish rates.

National Irish Bank led the way yesterday by announcing that it was cutting its variable rate mortgages for existing borrowers from 7.6 per cent to 7.1 per cent.

Other lending rate reductions will range from a quarter to half a percentage point while deposit rates have been cut by similar amounts. The changes take effect from the close of business today.

"Speculation on the timing of a decline in retail interest rates has been widespread over recent weeks," chief operating officer Mr Philip Halpin said. "By cutting interest rates, National Irish has decided that our customers should be the first in the market place to benefit from the rate cuts in the lead- up to the introduction of the euro in January 1999."

Although it has not lowered its variable rate yet, Irish Permanent has announced that it is reducing its new business fixed interest rates. From October 9th, it will also offer a one-year fixed-rate mortgage at 4.75 per cent, the lowest available in the market.

The September consumer price index could prove a key factor in determining the timing of the first rate cut. It is widely expected to show that consumer prices are close to peaking, if they haven't done so already. Forecasts for the year-on-year increase in inflation range from 2.9 per cent to 3.3 per cent, compared with an annual inflation rate of 3.2 per cent in August, the highest level for six years.

The Central Bank's inflation fears should also have been assuaged by the performance of the pound against sterling in recent days. The British currency has slipped amid widespread expectations that the Bank of England's monetary policy committee (MPC) will sanction a quarter point interest rate reduction at its two-day meeting, which ends today. Hopes of lower British rates have dragged sterling to 16-month lows against the deutschmark and pushed the pound to its highest levels against sterling in more than a year. It closed yesterday at 91.24p sterling, up from 90.40p on Tuesday.

The decision by the Spanish central bank to cut its benchmark rate from 4.25 per cent to 3.75 per cent earlier this week has also added to the pressure on Ireland, Italy and Portugal, the three euro candidates whose rates remain out of line with those in the rest of the euro zone, to start the convergence process.

"As each week goes by, the probability of a rate cut goes up," says Mr Pat O'Sullivan, economist with AIB Group Treasury. "The bank has to cut rates but if it sees inflation peaking, sterling weakening off and other central banks cutting, it will add to the pressure to start easing."

Some commentators believe that a rate reduction could be announced in the next few days provided the inflation data do not throw a spanner in the works.

While a cut can theoretically be announced at any time, the bank has traditionally chosen to announce interest rate reductions following its weekly council meeting on a Friday. However, in recent months, it has begun to reveal the weekly rate at which it supplies funds to the wholesale money market each Monday and could use this opportunity to make an announcement when it decides to move.

Analysts believe a first cut of 75 basis points is on the cards, given that Irish rates have to fall by nearly three percentage points by year-end.