Fixed interest rates may be on the slide following IIB Homeloan's decision to shave a few percentage points off its two-year, three-year and five-year fixed-rate mortgages. Laura Slattery reports.

Effective from last Tuesday, the rate cuts were heralded by the lender as a piece of good news. Elsewhere, it was interpreted as a bid by IIB to position itself at the front of the fixed-rate market, rather than as a response to any change in long-term bond yields, which traditionally determine movements in fixed rates.

Nevertheless, the IIB decision to cut rates could prompt similar moves from other lenders as they fight for the position of most competitive lender in each of the fixed-rate categories.

All of this is good news for homeowners intent on fixing over a two or three-year term, but had feared that they had missed the opportunity to lock in at the lowest, money-saving rates that were on offer before the summer round of fixed rate increases.

There are three reasons why people fix their interest rates rather than exposing themselves to the variable rate market.

The first is because first-time buyers feel that the one-year fixed rate discounts offered by most lenders are too good to pass up. The second is that people following a strict household budget want the security of knowing what their monthly repayments will be for a certain amount of time. But it is the third reason why people opt for fixed rates that can prove the most problematic: they do it because they think the fixed rate will beat the variable rate over the term of the fix.

So many of those who did opt for one-year, two-year or even longer fixed mortgages earlier in the year would have done so in the expectation that variable interest rates would rise, justifying their choice and saving them money in interest.

For the best part of 2004, all signs have been pointing toward the European Central Bank (ECB) lifting its base interest rate off its historic low of 2 per cent, perhaps nudging it up a quarter of a percentage point.

This would then have a knock-on effect on variable rate mortgages, as lenders would quickly pass the rate increases on to their customers. But as a result of a variety of global economic factors, it hasn't happened yet.

Now any move to increase interest rates is unlikely in the short term, according to Dr Dan McLaughlin, group chief economist at Bank of Ireland. The reason? The recent dramatic rise in oil prices. "In August and September the ECB seemed to be preparing the market for a rate rise in November or December," Dr McLaughlin writes in Bank of Ireland Global Markets' October economic bulletin.

But soundings from the ECB have changed in the past few weeks in response to the acceleration in oil prices, he adds.

"Comments by Jean Claude Trichet, the president of the ECB, suggest that the bank is now more worried about growth rather than inflation, implying that rates are again on hold for a while," Dr McLaughlin writes.

So it's happy days for borrowers on a variable rate: their lender is unlikely to make a Scrooge-like increase in their mortgage repayments between now and Christmas.

But it's not such a great omen for homeowners who fixed at interest rates higher than the standard variable ones available in anticipation that the variable rates were about to leapfrog their chosen fix.