WHEN the news of the German interest rate cut came from Frankfurt at around noon yesterday, the Dublin market held its breath. The reduction in the German money market rate was bigger than expected and some analysts felt it would be enough to avert an increase in bank and building society rates here. It was clear that everything now depended on what happened on the money market.
However, despite interest rates falling across Europe in response to the German move, the key one month rate in Dublin remained stuck stubbornly above 5.5 per cent. The Central Bank, through its action in the market, made it clear that it wanted to see the rate remain above 5.5 per cent and thus trigger an increase in retail interest rates. Before long, Irish Permanent had announced a quarter a point rise.
It is clear that the Central Bank's main concern is the growth in lending from banks and building societies and its possible inflationary implications.
For some time, the market had believed boosting the value of the pound against sterling and pushing it higher in the ERM band was the main motivation behind the pressure for higher rates, and this clearly was a factor. However, the pound has been rising in the ERM and the decision to push rates higher, even as borrowing costs fell elsewhere in Europe, showed that the domestic economy was the Central Bank's main concern.
The latest figures show that, in June, borrowing was running more than 13 per cent ahead of last year. Just as the autumn house buying season is about to move into full swing, the Bank appears to want to send a warning shot to remind borrowers that rates can rise as well as fall. However, a quarter point increase is likely to have little impact. The Bank may well have preferred if the Germans had kept their powder dry yesterday, prompting a bigger increase in Irish rates.
Banking sources were fairly confident yesterday that no further increases are on the immediate horizon once the round now started is complete. However, another quarter of a point rise cannot be ruled out. Beyond that, much will depend on the Bank's judgment of inflationary risks and rate trends elsewhere in Europe.
