Irish Permanent moved swiftly yesterday in response to the European Central Bank's interest rate cut, announcing a quarter of a percentage point cut in its variable mortgage rate, although the cut will not come into effect for existing borrowers for some time. The bank was responding to the ECB's surprise move to cut interest rates by half a percentage point - twice what the markets were expecting. Significantly, however, it is leaving deposit rates, which are already at rock bottom rates, unchanged. The ECB rate cut, which is designed to boost sluggish growth rates in Germany, France and across much of the euro-zone, and to restore some depleted confidence in the euro, will bring further relief for borrowers in this State. But it will hardly be welcomed by policy-makers, amid concerns that it will trigger inflationary pressures, in the housing market in particular. The ECB's president, Mr Wim Duisenberg, has moved to counter this view: "We do believe that this rate cut will pose no additional threat of inflationary pressure - either in small or in large countries," he said. For all that, Mr Jim Power, the Bank of Ireland economist, spoke for many when he suggested that the booming Irish economy needs the latest interest rate cut "like a hole in the head". It may be that inflationary fears have been somewhat exaggerated in recent years but the Spring Bulletin from the Central Bank - using a more inclusive measure for inflation - provides little grounds for complacency; it showed consumer inflation running at 3.2 per cent, much higher than the level measured by the Consumer Price Index. There will be concern that the ECB's action (which could be followed by more cuts in the summer if the latest move fails to lift the wider European economy) may lessen the impact of the Bacon report on the housing market. With demand continuing to outstrip supply, the most likely scenario is a further surge in house prices as the cost of borrowing comes down. The recommendations of Dr Peter Bacon have already done much to curb the speculative excesses in the housing market, but until the difficulties on the supply side are resolved, the Government can do little about house-price inflation.
The wider concern is that the continuing rise in house prices will fuel wage pressures and undermine attempts to build a successor to Partnership 2000. The voices heard at the teachers' conferences during this week, where delegates were told of young teachers who can no longer afford to buy a house, may be a portent of things to come. The high level of the Exchequer surplus will make it difficult for the Government to oppose demands from teachers and other sectors. It is all a salutary reminder that interest rate cuts may not always be good news.