FIGURES showing rapid growth in borrowing from banks and building societies have put upward pressure on interest rates. The latest Central Bank figures, published yesterday, show that borrowing in June was up 13.3 per cent from the same time last year. This is higher than most analysts had predicted and some believe it could lead to a rise in retail back rates and mortgages.
The strong figures put pressure on inter bank interest rates, which traditionally trigger retail rate rises and cuts. The key one month rate is now trading over 5.5 per cent, which is generally seen as the trigger for rate rises.
Any move is now dependant on the central bank which can choose to keep the money market rate up, or inject money into the market which would bring the rate down below the trigger point. The market will closely watch the Central Bank's attitude in the market this morning for clues about whether it believes an increase is warranted.
Market analysts are divided over whether rate rises are on the cards, but they are agreed that if an increase occurs it will be small. With intense competition on the mortgage market most banks and building societies will be reluctant to make the first move.
Annual growth in underlying credit, the key measure of borrowing calculated by the Central Bank, was running at 13.3 per cent last month, up from 12.3 per cent the previous month. Mortgage lending, a key area of concern for the bank, grew even more rapidly at 15.2 per cent for the year to the end of June. This was, slightly slower than the end of May figure when it reached 15.4 per cent.
Non mortgage lending grew by 13.9 per cent to the end of June, compared to 13 per cent at the end of May.
The slight fall in mortgage demand is one reason the Central Bank may not choose to force a rate rise, according to Mr Dermot O'Brien, chief economist at NCB Stockbrokers.
The latest consumer and wholesale price data also continue to point to subdued inflationary pressures, Mr O'Brien said.
But Mr Jim Power, chief economist at Bank of Ireland Treasury, said a rise in interest rates is now on the cards. This is an "unambiguously strong" number, he said, and there is a "strong risk" of a rate rise.
The bank has consistently pointed out that it will not hesitate to push up rates if underlying credit growth is too strong. The level so far this year is certainly well above the Bank's nominal GNP forecast for the year of 7.5 per cent.
"The current rate of expansion may be just a little too high for the authorities' comfort," according to Mr Alan McQuaid, economist with Bloxham stockbrokers.
He also pointed out that the Central Bank pushed up rates in two separate moves early last year. Once it was reacting to high credit growth and the second time to a fall in the pound against the deutschmark.
"There is every chance the Bank will sanction a rate rise today. If it doesn't materialise this month there is every possibility that a rate increase will take place in early September if the July banking figures show no sign of improvement," said Mr McQuaid.
At the same time, official external reserves at the bank fell, by £63 million to £5.05 billion, partly reflecting increased intervention on the foreign exchange markets.
