NEXT week's meeting of the German central bank will have a pivotal influence in determining when Irish bank and building society rates will rise, according to analysts.
Market sources have indicated that, while the Irish Central Bank would probably prefer to see mortgage and other retail interest rates rise before the Bundesbank meeting on Thursday, financial institutions are now likely to wait upon the outcome of the meeting before adjusting their rates.
The policy making US Federal Open Market Committee is also due to decide on the direction of US interest rates on Tuesday.
In Dublin yesterday wholesale interest rates continued to trade above 5.5 per cent, the level sufficient to trigger an increase of half a percentage point in bank and building society rates. However, none of the financial institutions has yet moved to raise its main variable interest rates and deposit rates.
On the currency markets, the pound remained at 103p against sterling and was virtually unchanged against the dollar at $1.60. The Irish currency gained two pfennigs against the weaker deutschmark to close at DM2.3857.
While most market analysts say it is just a matter of time before rates go up, Irish Intercontinental Bank economist Mr Austin Hughes said yesterday that the extent to which German rates may be cut will determine the next move in Irish rates.
"An aggressive cut by the Bundesbank might postpone a hike in Irish rates for some time, while a token gesture would make a hike all but inevitable," according to Mr Hughes. However, if the bank leaves rates unchanged on Thursday, he said an early announcement of higher retail rates will follow.
Ulster Bank's head of treasury, Mr Declan O'Neill, said Irish financial institutions are now likely to watch developments at the Bundesbank this week before deciding to move on rates. "If a mortgage rate hike doesn't happen by then, they may decide to wait for next month's credit figures before sanctioning any move," according to Mr O'Neill.
Analysts, who had been predicting that some of the institutions would have raised rates by now, say the stand off appears to be mainly due to competitive pressures.
With all of the institutions vying for new business, particularly on the mortgage side, it seems clear that no one wants to be seen to be the first to increase rates.
Senior Bundesbank officials this week raised hopes of an imminent cut in German interest rates, hinting at the bank's concerns about the performance of the German economy.
Its chief economist, Mr Otmar Issing, said the German economic recovery was not so robust as to be sure it would continue. His comments came just a day after a Bundesbank report held out the prospect of some easing in its key short term repurchase or repo interest rate, saying the bank would continue to monitor the growth in money supply to assess scope for lower rates.
The markets will also be anxiously watching the Federal Reserve which some commentators have predicted could sanction a rise in US interest rates. Nevertheless, recent US economic data, showing subdued inflationary pressures, have led others to believe it will leave its key rates unchanged.
"A major faction in the Bundesbank wants to keep markets guessing," said Mr Holger Fahrinkrug, economist at UBS. "The market has to be kept believing that it would be expensive to bet on a rate increase.
But that leaves the central banks treading a very fine line. It dearly wants to keep long term market interest rates down in order to stimulate investment spending, which is the key to economic recovery. However, with its key discount and Lombard lending rates already at historic low levels, it has only its short term or repo rate left to signal that rates are on an easing trend, analysts said.
