One of the biggest effects of the Russian economic crisis on the Republic is likely to be the advent of even lower interest rates than anyone was expecting.
Fixed rate mortgages are likely to be heading lower while variable rates may be even cheaper than anyone anticipated only a month ago.
What is certainly true is that Irish and German rates will be at the same level at the end of the year as we enter the euro. Up to now most commentators had been predicting a small rise in German rates: with the result that Irish rates would not have had to fall so far to achieve convergence. But these assumptions have been turned on their head as the prospects of a German rise become increasingly remote.
It now appears that unless the Russian crisis is resolved in the next couple of months no rate rises can be expected from Germany or indeed the US. But it is also true that anything is possible - after all at the beginning of the summer practically no commentators were expecting the market meltdown of recent weeks.
But many economists are worried. Mr Jim Power, chief economist at Bank of Ireland believes that although the situation in Russia is already dire, it could get worse and the economy there could be "wiped out".
The principal impact of this on the Republic is through German economic exposure to the East. Most of the large German banks have lent heavily to Russian investors over the past few years, while many German firms also have significant trade dealings with Russian enterprises. Both are likely to feel the effects of the current crisis before too long.
As a result it appears unlikely that Mr Hans Tietmeyer and others at the Bundesbank will raise rates. Some even believe they may cut them further, particularly as there is little domestic reason for higher rates.
The money markets are already taking this into account and as Dr Dan McLaughlin, chief economist at ABN AMRO points out, they are now predicting that German three-month rates will be trading at 3.6 per cent in December, well below the 4.1 per cent expected in May. This means that Irish rates will have to fall further to meet the convergence standards required by monetary union and they may stay lower for longer.
At the moment the Irish inter-bank rate, the rate at which the banks buy and sell to each other, is around 6.19 per cent, while the German equivalent is at 3.3 per cent. That means that Irish rates have about 2.9 percentage points to fall by the end of the year if German rates do not move.
Variable mortgages, which are currently around 7.5 per cent could potentially fall to around 5 per cent. If the one-month rate is trading at 3.5 per cent in January, normal margins would dictate that the mortgage rate should be about 5 per cent. However, most lenders insist that variable rates are likely to be closer to 5.75 per cent as savers' returns cannot be allowed to go much lower.
Earlier this week Mr Michael Fingleton, managing director of Irish Nationwide, predicted that variable rates will be running at around 5.5 per cent at the end of the year, while longer term fixed rates will remain at current levels. However, he conceded that lenders have been taking wider margins on fixed rates and competition may force these down by around half a percentage point. This would leave five-year money at around 5.9 per cent and two-year at about 5.4 per cent.
One reason lenders feel secure about maintaining higher margins in these products is that very few homeowners have been opting for longer fixed term mortgages and some of the biggest lenders say this sector of the market is now dead. Most borrowers feel more comfortable going for a fixed rate to the year 2000 or sitting out the variable, waiting for a fall.
There has been much debate about when the rate cuts are likely to materialise and most observers now believe it will happen over a few weeks at the end of the year.
The Central Bank had been hoping that a rate rise in Germany, perhaps in October, would allow it to cut rates. But while it believes this may still be a possibility later in the year, the chances are now far slimmer.
It now appears the Central Bank is likely to allow the market to push rates down. This will result in larger cuts at the end of the year. However, according to Dr McLaughlin the bank may make a small token cut in interest rates in September or October.
The bank is concerned that large interest rate cuts could fuel the economic boom, particularly in asset prices. However, most of the danger of an overheating stock-market has disappeared, at least for now. Most of the cuts are already factored into the housing market.
On top of that, according to Mr Power, the global environment is now deflationary and thus the problem is no longer the overheating of this economy. Already investors are becoming more cautious about the extent of their exposure, he noted.
Nevertheless, the spectre of the currency speculator is never far away. As Dr McLaughlin points out, Norway had to increase its interest rates twice last week to ward off speculators, while central banks in Sweden, Denmark and even Italy were forced to intervene to protect their respective currencies. In such an environment it would be a very brave central banker who would go for rate cuts, even with the protective mantle of the single currency.
The bottom line is that homeowners will probably have to wait until Christmas to benefit from rates at around 5.5 per cent for both fixed and variable rate borrowers.
