THE Central Bank has continued to hold down interest rates on the Dublin money market, even after the newly-independent Bank of England raised UK rates yesterday. However analysts warn that the Central Bank could decide to let rates move higher after the election, if the pound weakens further against sterling.
The Bank of England moved rapidly and decisively to establish a sound anti-inflation record by raising British interest rates by a quarter-point to 6.5 per cent, the second such increase under the Labour government.
The rise had little impact on sterling which remained at highs against the mark. The pound remained stable, closing at 91.45p against sterling from 90.99p on Thursday and at 2.5736 marks from 2.5654 a day earlier.
Market analysts warn that if the pound slips further against sterling, Irish interest rates could again be under upward pressure. For the moment the Central Bank is continuing to keep rates down by supplying funds to the market, although traders remain nervous.
The key one-month rate on the Dublin money market was trading around 6 3/8 per cent yesterday. A rate around 6 3/4 per cent would put pressure on for another round of rises in bank and building society rates.
But Mr Jim O'Leary, chief economist at Davy Stockbrokers, said he thought the Central Bank would need to have a very strong basis to raise rates. "It would need to have the kind of pretext that was there six week's ago" when strong credit figures preceded the last official rate increase.
The UK rate rise had a limited impact on the market, Mr Jim Power, chief economist at Bank of Ireland, said as the UK rate rise had been well heralded in advance.
However, a rumour - later categorically denied by official sources - that the EU finance ministers meeting in Luxembourg this week-end could announce a postponement to monetary union boosted the mark against most currencies with sterling losing over two pfennigs. Another rumour that the new French government is now predicting a deficit closer to 4 per cent than 3 per cent also helped the mark.
Market analysts believe that the UK rate rise and the continuing uncertainty surrounding the single currency are likely to continue to support sterling over next week.
"We could see the pound go through 90p," according to Mr Power. "That would make the Central Bank very nervous" about the impact on inflation.
The UK rise will put further pressure on UK exporters who are already suffering form the strengthening currency. Business organisations on the whole expressed concern that the rate rise would hit the struggling manufacturing sector by further boosting the strength of sterling.
The Bank of England, however, fears that an upsurge in consumer spending, fuelled by the windfall shares handed out by building societies which are converting from mutual to public bank status, will stoke inflationary pressures next year.
Employment data from the US: also underlined fears that another rate rise could also be on the way in the US.
The US unemployment rate fell in May to its lowest level in more than 23 years, but jobs growth slowed sharply.
The Labour Department said the unemployment rate edged down to 4.8 per cent in May - its lowest level since October 1973 - from 4.9 per cent in April. But payrolls rose by just 138,000 last month after increasing by a whopping 323,000 in April.
Analysts said the data paints a picture of a very tight jobs market. Federal Reserve policy-makers are will encourage workers to demand big pay rises, eventually stoking up inflation.
