THE outlook for interest rates is volatile and a clear upward trend in Irish borrowing costs is likely over the next year, according to Mr Austin Hughes, economist with Irish Intercontinental Bank. This is because the markets are likely to become periodically nervous about the move to monetary union.

While the main barrier to other countries entering monetary union is likely to be the size of their budget deficits, in Ireland's case the main doubts may be about exchange rates and inflation. Ireland may also be the only economy whose principal trading partner remains outside EMU. "Whether this different starting point raises questions about Ireland's candidacy could become important," said Mr Hughes, speaking at a seminar in Dublin hosted by IIB and the Irish Association of Corporate Treasurers.

With the economy also performing strongly, upward pressure on interest rates is likely over the next year.