NUMBER of the major banks and building societies are considering interest rate increases and announcements of higher rates for borrowers are now expected within days.

The special short term fixed rates on offer to new borrowers are set to rise, while the institutions are also deciding when to increase their main variable interest rates and deposit rates.

Interest rates remained above 5.5 per cent on the Dublin money market yesterday, closing at around 5.65 per cent. It is now only a matter of time before the banks and building societies move their rates higher, although for competitive reasons none wants to be the first to move.

A number of the major institutions are expected to discuss the interest rate situation today.

Close consideration will be given to special introductory rates as well as the main variable interest rates and increases are expected in these shortly.

Existing borrowers are likely to face higher repayments from next month. Some institutions are likely to hold their variable rates at current levels for some time to try to build market share.

Dealers on the Dublin wholesale money market said that the Central Bank appeared content with the one month rate trading at around 5.65 per cent, just above the 5.5 per cent trigger level.

While the Bank has put some funds into the market when the rate has edged towards 5.75 per cent, it has done nothing to push it back below 5.5 per cent.

Market sources also say that the rate at which the Bank supplies short term funds to the market has, risen in line with market rates, a sign that it wishes to see the higher wholesale rates hold.

The Irish currency fell back to just below 104p yesterday against a resurgent sterling. The British currency gained after a Bank of England report earlier this week called for higher British interest rates and it rose yesterday by more than a pfennig to over DM2.30.

Wholesale market rates have held at current levels for a week and although, formally, the main financial institutions will only say they are monitoring trends in the market most now accept it is only a matter of time before borrowers face higher rates.

Under most pressure to increase rates are institutions such as the banks and some of the smaller specialist lenders which rely most heavily on the money market for funding. Over coming days some of the lenders are expected to start to withdraw or increase the special introductory rates on offer to new borrowers.

These rates which offer rates of 5.3 to 6 per cent for the first year of a mortgage have effectively been loss leaders designed to increase market share. However, the higher money market rate increases the cost to the institutions of funding such loans and sources say the existing levels cannot continue for much longer. Shorter term fixed rates on offer existing variable rate borrowers also likely to rise, with mortgage rates likely to increase by around half a percentage point and increases of up to half a point in other rates.

Depositors are likely to benefit from higher interest rates although the banks and building societies may try to rebuild profit margins on their core business by increasing these rates by less than borrowing rates.

The move to higher interest rates started last week after figures showing that borrowing in June was running 13.3 per cent ahead of last year. The Central Bank wants to see slower credit growth and it may also hope that higher interest rates will maintain a strong exchange rate for the pound against sterling and against the EMU currencies.

A higher pound exchange rate helps to control inflation by bearing down in import prices.