An increase in British interest rates will give the Central Bank here even more ammunition to hold off on any cut in Irish rates.
In a completely unexpected move, the Bank of England announced a quarter-point rise in its "repo" rate the rate at which it lends money to banks to 7.5 per cent, citing inflationary pressures caused by a surge in average earnings.
Prices of British shares and government bonds fell immediately after the surprise announcement, and sterling rose against the mark and the dollar, before falling back again. At the same time, confirmation that Irish mortgage lending and credit are continuing to surge ahead will further underline the Central Bank's concerns about cutting rates.
The British rate rise came despite evidence from the Confederation of British Industry that the rise in underlying high street spending had slowed to its lowest rate since 1995, as well as a range of recent statistics pointing to a slowdown. Analysts were caught completely on the hop with the vast majority having written off the possibility of a rise.
"People had been pricing in cuts by the end of this year," said Mr Michael Dicks, UK economist at Lehman Brothers. "Today's move suggests we are talking about cuts next year, which will hold sterling up at around DM2.90 to DM2.95 until the fourth quarter," he added.
"There is absolutely no inflation whatsoever, and the Bank of England said as much in its own recent inflation report. The Bank might well look back on this decision and regret it. It defies all logic," said Nikko Europe economist, Mr Simon Briscoe.
According to Mr Jim Power, chief economist Bank of Ireland group treasury, there was a scramble to buy pounds initially, because nobody really expected a rate rise. But it has not changed the fact that the British economy was slowing, while core European economies were building up speed.
But despite the evidence of a slowdown in manufacturing and services, the Bank of England's Monetary Policy Committee (MPC) said in its statement that private sector earnings had jeopardised its inflation target.
It also said sterling had remained around 3 per cent lower than the 2.91 mark central projection of its May inflation report.
The UK Treasury said the rate rise underlined the need for greater responsibility in wage demands.
