A reduction in Irish interest rates of as much as three quarters of a percentage point is now believed to be imminent. Pressure on the Central Bank to finally cut rates intensified last night as its US equivalent announced its first rate reduction in three years.
The Irish reduction, which will probably be announced by the end of next week, will be the first in a series between now and the end of the year which will bring interest rates here into line with those in Germany and result in significantly reduced mortgage and other loan payments.
But the announcement will herald bad news for savers, who can expect a fall in already low returns on their deposits.
While the Central Bank is thought likely to announce a rate cut in the coming week, the precise timing and extent of the reduction is not yet clear. The bank is likely to wait until after credit figures giving details of banks and building societies lending have been published tomorrow. It is only likely to cut interest rates if the figures do not show too rapid an expansion in lending.
A move by the bank is likely to receive further impetus from last night's decision by the key policy making committee of the US Federal Reserve to cut short-term interest rates by one quarter of a percentage point. It did so to ease credit, in the hope that this will help the US weather the global financial storm.
The Central Bank needs to guide rates down by almost three percentage points between now and the new year to bring them into line with German wholesale market rates of 3.3 per cent.
The first reduction will probably be between half and three quarters of a point. This will knock on to a somewhat smaller fall in the rates charged to borrowers. A half point cut would save £24 a month from the cost of an £80,000 mortgage.
According to Mr Jim Power, chief economist at Bank of Ireland, the increasing pressure from Europe for Ireland to begin cutting rates is finally bearing down on the bank.
This was hotly denied by the Minister for Finance, Mr McCreevy. "The governor of the Central Bank, Mr Maurice O'Connell, has full control until January 1st," he repeatedly stated. However, there have been repeated statements from senior European financiers - including the European central bank president, Mr Wim Duisenberg, calling for rate cuts here.
The Central Bank has always said it will cut rates as late as possible. But many believe the bank may now think this is the time, so as not to provide too much at one time to mortgage holders, or to leave all the reductions to the end of the year. The bank is worried that a large cut in interest rates, leading to lower mortgage payments could fuel inflation.
Traditionally, the bank here has always tried to both raise and lower interest rates at the close of play on a Friday, but that is not the tradition across the rest of Europe. In recent months it has moved to a European system of tenders as a way of providing funds to the market and leading interest rate trends. It announces the interest rate at which it will supply this money on Mondays. At the moment this rate is 6.19 per cent and must fall to 3.3 per cent by the end of the year and the first reduction may be announced next Monday.
Alternatively, the bank could simply cut the short-term lending facility, which is currently at 6.5 per cent. This could be done on any day and would lead to a drop in money market rates and mortgage cuts.