FIXED RATE mortgages are set to fall further by the end of the year if Ireland stays on track for European Monetary Union, the chief operating officer of National Irish Bank, Mr Philip Halpin, has said.
But short term interest rates which dictate variable mortgage and bank lending rates, will not fall further, Mr Halpin said. Speaking at the World Ploughing Championships in Carlow, Mr Halpin said long term interest rates on the bond markets which influence fixed interest lending rates, will fall, although he did not put a figure on the likely fall in fixed rates.
Already, Irish Permanent has cut its fixed rate mortgage rates by half a percentage point and other lenders are expected to follow as the flood of overseas money into the Irish bond market drives down rates. Three year fixed rate mortgages are now available at 7.25 per cent similar to many of the current variable rates on offer.
"Given that half the mortgages taken up are fixed, the bond rally amounts to a mortgage rate cut, and there is little the Central Bank can do. Indeed, the only realistic option is to abandon the cap on the currency and let it appreciate to dampen any inflationary pressure, says Riada chief economist Dr Dan McLaughlin.
And the Central Bank's activities have also come in for strong criticism from Davy Stockbrokers chief economist Mr Jim O'Leary. In his weekly report, Mr O'Leary suggests that the banks' apparent willingness to intervene in financial markets to prevent a green pound devaluation indicates a lack of independence.
"Why would the Central Bank choose to subordinate policy to the mood of Irish farmers? It is hardly because it aspires to the reputation of being the only monetary authority in the western world for whom farm income support takes precedence over price stability.
"It is far more likely that the answer resides in the fact that exchange rate policy, as distinct from interest rate policy, is not determined by the Central Bank but by Government," said Mr O'Leary.
Mr O'Leary has urged the Central Bank to allow the pound to rise and find its own level on foreign exchange markets, and suggests that the pound would quickly rise to 104p sterling and DM2. 50.
"Expectations of an imminent collapse in short term interest rates would evaporate and Irish bonds, especially the shorter maturities, which have been greatly stimulated by such expectations, would give up some of their recent gains. The Central Bank would also have taken a decisive move towards establishing its independence."
