Irish short-term market interest rates could fall by as much as three percentage points between May and July, according to a new forecast from NCB stockbrokers. And highlighting the downward momentum in Irish borrowing costs, the cost of one year money on the Dublin money market fell below 5 per cent yesterday as investors speculated on substantial rate cuts in the months ahead.

NCB believes that the Central Bank will have little option but to let short-term rates fall once the decision is taken at the start of May on which countries are going into EMU and how the entry level exchange rates will be set.

A fall of this magnitude in wholesale money market rates - the key one month rate is the key measure - would lead to significant cuts in repayments for borrowers. The full three percentage point reduction would be unlikely to be passed on by banks - as they will be unable to cut savings rates by this amount - but a sizeable cut in mortgage and other borrowing rates would still be triggered. The bank will not cut official interest rates until the Government clarifies its position on the entry level for the pound into monetary union, the brokers believe. Once this clarification is given, however, "the way will be cleared for the start of convergence and we do not believe the bank will delay the process".

At the latest, NCB predicts, official interest rates will be begin to be cut in the week after the May 2nd decision on EMU membership. NCB believes that the process of interest rate convergence will then be completed by July.

Any attempt by the bank to slow the fall in interest rates would be fruitless, the brokers believe, and they expect a series of rates cuts which could see the bank reduce the rate at which it supplies funds to the money market - the repurchase rate - by 0.5 of a percentage point a week during May and June. Even if the bank wanted a slower decline in rates, trying to achieve this might only lead to destabilising swings in the pound's exchange rate on the markets. NCB believes that the Government should have announced a revaluation in the pound's central ERM rate some time ago, but that a revaluation now "would hardly be worth it". The fall in the pound's value on the markets is now bound to lead to an acceleration in the rate of inflation, NCB predicts, and the chances that the rate will accelerate above 3 per cent in the second half of the year are strong. This could lead to pressure to renegotiate the Programme 2000 pay agreement, they believe.