Banks and building societies are continuing to monitor interest rates with most expected to announced lower rates for savers and borrowers next week.

So far, the Irish Permanent is the only institution to announce a reduction in its variable mortgage interest rates by 0.5 of a percentage point to 5.5 per cent. The new rate will come into effect from January 1st.

The Irish Permanent has set the benchmark for the market, passing on a 0.5 percentage point reduction in mortgage interest rates as a result of a 0.7 per cent drop in Central Bank rates on Thursday.

The institutions were caught somewhat off guard this time around. Most had been expecting some adjustment in Central Bank rates next week as part of its preparations for Ireland's entry into European Monetary Union but on a smaller scale. The final rate cut this year was expected to be of the order of around 0.4 of a percentage point, bringing Central Bank rates down to 3.3 per cent in line with other European states.

But the European Central Bank decided on Tuesday to reduce the base wholesale money market rate at which the euro would start from the expected 3.3 per cent to 3 per cent. The Irish Central Bank subsequently pushed its rates down to these levels forcing the financial institutions to make bigger-than-expected adjustments to retail interest rates.

The institutions are trying to adjust their lending rates in response to the lower Central Bank rates but are also trying to keep the interest rates offered to depositors as high as possible.

Demand deposits are likely to be cut from already meagre levels. On the lending side, the institutions will also be under enormous pressure from their competitors to aggressively reduce rates in what will be the final interest rate cut in the run-up to European economic and monetary union.