Larger EU states will set policy on interest rates

Interest rate policy in the euro zone will be set to meet the requirements of the bigger member states such as Germany and France, Mr Wim Duisenberg, the president of the European Central Bank has indicated. This means that Irish interest rates will fall sharply before the new currency is introduced next January, as Irish market interest rates fall to levels now prevailing in France and Germany.

At the moment short-term interest rates on the Irish wholesale money market are almost three percentage points over German levels. When the euro is introduced next January, short-term rates across Europe will have to be identical, but there has been some debate about whether the rates in the peripheral members such as Ireland would fall to current German levels, or whether an increase in German rates over the balance of the year would mean a smaller decline for Ireland.

Mr Duisenberg said that interest rates in the 11 euro-zone countries should converge to a low level, indicating that Irish market rates are set to fall close to current German levels. This would knock on to somewhat smaller - but significant- reductions in borrowing and savings rates for Irish consumers. It will also not be welcomed by the Central Bank of Ireland, which is holding out against reducing Irish rates for as long as possible partly in the hope that an increase in German rates might leave Irish rates with less to fall.

In an interview in the newspaper Frankfurter Allgemeine Zeitung, Mr Duisenberg said that the current level of money market rates in France and Germany was appropriate, given that these countries were lagging behind countries such as Ireland and the Netherlands in the economic cycle.

And because the economic weighting of France and Germany in the euro zone was high, it would be appropriate for interest rates to converge at a low point, he added.

Countries which would prefer to keep their interest rates high owing to the strength of economic growth should be prepared to use measures other than monetary policy, he said.

If monetary policy instruments can't be used, "the onus will be on fiscal (Budgetary) policy," Duisenberg said. This indicates that Ireland will remain under pressure to run a tight Budget policy to try to hold down inflation.

Mr Duisenberg said that many of the euro-zone countries should not relax in their efforts to keep consolidate public finances.