Even experts have trouble forecasting the rise and fall of interest rates in these uncertain times, writes Una McCaffrey

Predicting where interest rates will be at any given point in time is not easy. Even the experts have to admit that it is tough, particularly when the global economy seems to have been driven by little more than sentiment in recent times.

Take the past 12 months for example. Interest rates fell and fell, with the US Federal Reserve engaged in the most trenchant slashing.

At the start of last year, the Fed rate was 6.5 per cent and, post September 11th, ended up at 1.75 per cent, where it remained until earlier this week. The ECB was less enthusiastic, but also went along with the trend, starting 2001 with a repo rate of 4.75 per cent and ending up at 3.25 per cent by the time December came.

It has remained here ever since, with the result that most variable-rate mortgage holders have seen reasonable stability in their monthly repayments for several months. While this spells good news for family budgets, the wider story is less positive, since stable interest rates are indicative, in this instance at least, of little or no growth in the economy.

Back in January, it was widely believed that euro-zone interest rates were on the point of rising, reflecting the readiness of the global economy to expand.

Commentators were forecasting a Fed rate rise as early as May, presuming that growth took hold, with ECB rates likely to follow the leader without significant delay.

At the time, mortgage-holders and first-time buyers in the Republic were subjected to a significant amount of advice, much of it geared towards fixing their mortgage before the inevitable rate increase arrived. Some months on, the ECB rates remain stable, but most rates at which institutions are offering to fix mortgage rates have indeed risen (see table), on average by about 0.5 per cent.

Whether this movement acts as justification for fixing in January is a matter for the individual, but it at least shows that the attraction of fixed rates will depend on timing.

In simple terms, fixed rates tend to mirror trends evident in long-term interest rates (the yield on 10 year bonds for example) rather than short-term rates such as the 1-Month Euribor (European Inter-bank Offer Rate).

When the market judges that the economy is strengthening long-term rates tend to rise. This happens because the market is anticipating rises in short-term rates or, in other words, are "pricing in" rate hikes by the European Central Bank .

At the beginning of this year, amid optimism about the global economy, bond yields rose, thus spurring the increases we have seen in fixed rates. Currently, however, bond yields are tending in the opposite direction, as economic recovery looks less uncertain and the ECB appears to have less reason to raise short-term rates and more justification for leaving them unchanged.

So where does this leave the confused mortgage-hunter? To fix or not to fix?

To achieve value when fixing, mortgage-hunters need to look at two things. The first issue is whether interest rates will rise during the period that they plan to fix. The second issue is whether the fixed rates being offered by banks are likely to rise in the near term.

If the answer to these questions is yes, then it might make sense to fix. The best guide to the answer to both these questions is the direction of long term bond.

Current trends suggest that although the trajectory in rates is upwards, a short-term rate rise is not expected for several months.

Now could be as good a time as any to fix, provided an attractive rate can be found. For the record, fixers should probably do their best to seek a rate under 5 per cent.

Mr John Beggs, chief economist with AIB Group Treasury, says that consumers interested in fixing should consider the monetary difference between their institution's fixed and variable options.

In some cases, he says, the two will be so close as to overrule any real benefits of fixing. Looking forward, Mr Beggs is anticipating interest rates to remain untouched, at least by the ECB, for the next few months, thus opening a possibly beneficial window for locking into a fixed-rate product.

"I think that people would have some opportunity in the future to lock in," he says, acknowledging however that a quick change in sentiment could transform the picture overnight. "There is no doubt that looking a year out, short-term rates will have gone up."

Mr Austin Hughes, IIB Bank's chief economist, agrees that rates are hard to call in the short term, but puts his "best guess" at them being higher rather than lower next year.

"It depends whether the weakening we saw in the early summer months becomes a forceful trend towards downturn," he says, noting some pressure on the ECB to raise rates. As for fixing, Mr Hughes believes we could be on the cusp of value on fixed rates, but advises mortgage-hunters to think carefully and consider their personal circumstances before signing the dotted line.