BANKS and building societies continued to keep a close eye on each other yesterday, waiting to see which would be the first to raise its interest rates. With all of the financial institutions preparing to increase mortgage and other retail rates by up to a half of one percentage point, analysts say - it is just a matter of time before rates god up.
Despite opposition to a rate increase, particularly from the business sector, the institutions are preparing to increase their main variable interest rates and deposit rates. Existing borrowers are expected to face higher repayments from next month.
Special introductory fixed rates for new borrowers are also being withdrawn to be replaced by higher rates. The country's biggest mortgage lender, the Irish Permanent, raised its introductory discount rate for new borrowers from 5.8 per cent to 6.75 per cent, while the EBS yesterday raised its special one year fixed rate from 5.5 per cent to 5.95 per cent. One year fixed rates for existing customers have also risen from 7 per cent to 7.45 per cent.
Interest rates on the Dublin money market remained above 5.5 per cent yesterday, closing at around 5.65 per cent. At these levels, banks and building societies are keen to raise their interest rates to maintain profit margins.
However, with many of the key decision makers on holidays at the moment, it is understood some institutions are holding off on making such an announcement. In addition, for competitive reasons none of them wants to be seen to be the first to introduce higher rates.
The Irish Small and Medium Enterprises Association yesterday called on the two biggest banks, AIB and Bank of Ireland, not to increase their rates, saying such a move would force other institutions to follow.
In recent months, the Central Bank has indicated that it would be happy to see some increase in interest rates, particularly mortgage rates, to dampen inflationary pressures.
Meanwhile, the Construction Industry Federation has strongly disputed suggestions that the new houses market is a contributory factor to inflation.
On the contrary, the CIF director general, Mr Liam Kelleher, said that the supply of new houses on the market - 30,500 units were completed last year is counter inflationary.
"The industry's ability to construct new housing units in half the time it took 10 years ago is a major factor increasing the 5up, ply of new homes onto the market," said Mr Kelleher. He added that the most recent credit figures had shown an expansion in lending right across the economy at a higher level than the growth in housing lending.
Mr Kelleher warned that the construction sector was very sensitive to interest rates and said: "We don't want to see a rate rise." He conceded, however, that a 0.5 percentage point rise would be "manageable provided that's the end of it".
"What our industry wants is a stable long term interest rate environment."
