BANK and building society interest rates are set to increase shortly, unless interest rates ease on the wholesale money market. The key one month wholesale rate continued to trade above 5.5 per cent yesterday and with the Central Bank taking no action to push it lower, a rise in borrowing costs is looking increasingly likely.
The upward trend of interest rates is also helping to underpin the pound on the foreign exchange market. With sterling generally weak on the markets yesterday, the pound edged up to 104.35p sterling, from 104.26p on Friday.
Some market analysts had expected that the Central Bank might try to nudge interest rates lower on the market yesterday by injecting funds and thus remove the immediate pressure on retail interest rates. However the bank appears to be content with rates as they are and market sources said that made no move to inject funds into the market.
Opinion remains divided in the market about whether the Central Bank will increase its own short term facility rate the rate at which it lends to the commercial banks. This would be a clear signal to the banks and building societies that it wants to see higher borrowing costs. However even if the bank does not increase the short-term facility rate, higher rates on the wholesale market will, if they are maintained, create pressure for a rise in rates to borrowers.
Bank and building society sources said yesterday that none of the institutions is likely to rush into increasing its borrowing rates, unless the Central Bank moves its official rate. The competition for lending in the market will mean that none of the institutions will want to be the first to move, for fear of losing market share. However sources say that unless wholesale rates ease back, then an interest rate rise for borrowers and depositors will become inevitable.
Lenders are aware of the pressures on the money market and will be watching them closely, according to Mr Martin Walsh, head of lending at the EBS Building Society. However he said that even if a rise did occur, it was not likely to be the start of a prolonged rise in borrowing costs, given the strong performance of the economy and the low rate of inflation.
Mr Jim Power, chief economist at Bank of Ireland group treasury, said he expected the Central Bank to increase its short term facility rate over the coming days. However some other analysts believe that the Central Bank may be loath to do this, because it would be acting independently rather than moving in line with EMS trends led by the Bundesbank.
Speculation about higher inter est rates started last week after Central Bank figures showed a 13.3 per cent rise in lending in June compared to the same month last year. The bank may be concerned that this higher level of borrowing may start to fuel inflation later in the year, and hope that a rise in interest rates would slow the increase of borrowing and spending.
The prospect of higher interest rates also supported the pound on the foreign exchange market and the currency now looks well underpinned above 104p sterling. Mr Pat Delaney, the assistance director of the Small Firms Association, said that there was a whole series of negatives for the economy flowing from the currency situation and any interest rate rise will effect disposable income, lower growth and increase the cost of debt service," as well as increasing the rate of the pound against sterling.
The Central Bank should therefore resist any increase in rates, he said. Many small companies are" on the brink" because of the strength of the pound against sterling, he said.
