A SHARP rise in consumer borrowing has increased the risk of a rise in interest rates. The Central Bank will be concerned that higher borrowing it could fuel inflation this year. The news is likely to affect the Dublin market today.
Figures published by the Central Bank late yesterday confirm that the Irish economy is booming, with demand for credit continuing to grow, strongly.
There is no sign of a fall off in mortgage lending and the figures for non mortgage borrowing in November also show a sharp rise.
With Irish Government bond prices weaker yesterday as European, markets followed an overnight fall in the US market, dealers forecast the latest Central Bank data would depress bond prices today.
"The market is now waiting to see if the Central Bank will move to dampen down credit growth by increasing interest rates. This will depress bond prices," one dealer commented.
Bond and equity markets throughout Europe fell sharply yesterday following Tuesday's steep fall on Wall Street.
Stronger than expected US purchasing figures yesterday intensified speculation that US interest rates, were on the way up, further depressing US and international markets.
Share markets suffer9d a dismal, start to the new year, with all European markets ending lower after the fresh US economic data strengthened fears of inflationary pressures and upset markets. Bond prices fell sharply and yields rose after the latest US figures on fears that a rise in US interest rates may be imminent.
With international markets unsettled by fears of higher inflation and interest rates, the same concerns will preoccupy the Dublin markets over the coming days.
The Central Bank figures showed, that underlying growth in lending by the financial institutions came in at 16.4 per cent for the 12 months to the end of November, up from a rise of 14.4 per cent at the end of October.
Non mortgage Irish pound lending increased even more - 17.5 per cent from 14.2 per cent at the end of October - while the annualised rise in residential mortgage lending by all credit institutions was unchanged at 17.1 percent.
The November figures were ahead of market expectations and well ahead of the Central Bank's money growth targets for the year. The Central Bank wanted single figure credit growth last year.
Lending by all the financial institutions to private sector customers increased by 1.2 per cent or £389 million, in November, bringing the total amount in loans outstanding to £33.49 billion.
Lending for residential mortgages, rose by £124 million in November, broadly in line with the average monthly rise so far this year, according to the Central Bank. Other mortgage lending rose by £48 million.
The Central Bank figures shown that Ireland's external reserves fell by £691 million to £5.339 billion at the end of November.
The Central Bank attributed £200 million of the fall to a valuation adjustment, with the balance attributed to negative foreign exchange market interventions selling, foreign currency and buying pounds - and interest and principal payments on the National Debt.
Some of the drop reflects the Central Bank's attempts to support the value of the pound against sterling, according Mr Austin Hughes, economist with Irish Intercontinental Bank.
Commenting on the credit figures, he said they underlined the risk of higher inflation "inherent in the Irish economy at present". The latest figures were flattered by soft lending in November 1995 and show that the small 0.25 of a percentage point interest rate rise in August had little impact, he warned.
"There is very little for the Central Bank to smile about in these, latest figures," according to Mr Alan McQuaid, economist with Bloxham stockbrokers. Because of the continuing strong growth both in house prices and in credit demand, he forecast a rise of 0.25 of a percentage point in retail interest rates before the end of the first quarter.
"Further monetary tightening, albeit fairly small, cannot be ruled out later in the year if inflation shows signs of getting out of hand," he wamed.
Irish interest rates should fall when Ireland qualifies to join the European Monetary Union, he said. However, it could be 1998 before that happened, he forecast, because the Central Bank would have to implement interest rate/exchange rate policies that would enable Ireland to meet the EMU inflation and debt requirements.
Mr Eunan King, from NCB stockbrokers, said an interest rate rise of one percentage point would be needed to have an impact on the demand for credit.
However, he warned that such a move would drive the pound up significantly against all currencies and could lead to the pound having to join the EMU at an exchange rate up 10 per cent higher against the deutschmark than its current level.
