After a year of climbing steadily, interest rates now seem to be back on a downward track.

The recent surprise cut in US interest rates has prompted economists to review their forecasts and most now believe that the prospect of a slowdown in the US, the motor of the world economy, augurs well for borrowing costs in Europe.

While the European Central Bank (ECB) is not expected to rush into a raft of rate cuts, most analysts expect euro rates to end the year below their current levels.

"The timing of rate cuts is debatable but the direction rates will take is not," says Dr Dan McLaughlin, chief economist at ABN Amro. "A lot depends on the US where the outlook is very uncertain."

Economists believe that further US rate cuts to bolster the flagging economy, along with a stronger euro and weakening oil prices, point to reductions in official euro rates of at least half a percentage point during 2001.

This would take Irish variable mortgage rates down toward 5.5 per cent from their current levels around or above 6 per cent.

But if the economic slowdown in the US were to prove even more pronounced than expected, interest rates in Europe could fall even more sharply.

Already, market or wholesale interest rates have begun to factor in a more benign outlook on the interest rate front. A sharp drop in money market rates in recent weeks has led many lending institutions to cut their fixed rates.

Irish Permanent, EBS, First Active, Bank of Ireland and ICS Building Society are among the institutions to reduce fixed rates ranging from one to five years.

Many are now offering one, two and three-year fixed rates below their variable rate levels. EBS, for instance, is offering a one-year fixed rate of 5.65 per cent and a three-year rate of 5.85 per cent while its variable rate for existing customers is still stuck at 6.0 per cent.

So what does all this mean for mortgage holders? With fixed rates falling, is now the time to consider locking in to a competitive rate?

Dr McLaughlin remains sceptical. He argues that the interest rate climate faced by Irish borrowers has changed dramatically since the introduction of the euro two years ago. Where once Irish interest rates fluctuated in a broad range between seven and 15 per cent, he expects them to remain in a far narrower band, between 4 and 6 per cent, in the coming years.

As a consequence, the merits of fixing in the new euro regime are significantly diminished, while the costs of being on the wrong side of the fixed/floating rate argument have also fallen.

Last year, for instance, the average variable mortgage rate was 5 per cent, the same as in 1999 although mortgage rates rose sharply last year and fell the year before. Thus, a borrower who had fixed at 5 per cent for two years back at the start of 1999 would have paid more than his neighbour in the first year and less in the second year but would not have ended up significantly better off.

"I have never been a great fan of fixed mortgages for more than a year or so," Dr McLaughlin says. "I wouldn't be mad keen to lock in except where you get a very good bargain in which case it might be worth doing for a year."

However, others believe that borrowers should start to keep a close eye on the mortgage market as the next couple of months could throw up some attractive opportunities to lock into two or three-year fixed rates at a significant discount to current variable rates.

"There is an opportunity over the next couple of months to get the same rate for three to five years as the variable rate," says Mr Austin Hughes, economist at IIB Bank.

He believes that given the current uncertainty over the US, markets have started to anticipate quite significant developments in interest rates. There is a possibility that they have begun to price too aggressively, anticipating lower rates than may be the case if the situation in the US does not prove as bad as many people fear.

If we are indeed entering "a mini-cycle", a brief downward blip in rates before they steady again, this could present opportunities for those on their toes. If this does not happen, and rates fall sharply, this too presents opportunities.

The ideal time to fix is at the bottom of the cycle and with interest rates starting to fall, the aim should be to correctly identify the trough in interest rates. But this is easier said than done.

As Mr Hughes notes: "By the time we reach the low in variable rates, market rates will have started to track back up again."

In general terms, given the expectation that rates will broadly range between 4 per cent and 6 per cent, analysts believe that anyone who can secure a fixed rate below 5 per cent could be getting good value.

But they also say that it is probably too early to lock in just yet as we are still too close to the top of the interest rate cycle with most fixed rates, particularly those for existing customers, still close to 6 per cent. Most recommend waiting another few months, while keeping a close eye on the market, before deciding what to do.

Mortgage advisers also caution that borrowers should not get too carried away with the detail of whether to fix or not while ignoring the bigger picture.

Mr Richard Eberle, of Rea Mortgage Services, advises all borrowers to take account of their personal circumstances and their attitude to risk. Some people need the peace of mind a fixed rate offers, others would be distraught to see the variable rate dip below their fixed rate by even a small amount.

For some mortgage-holders, particularly first-time buyers, even small fluctuations in interest rates could prove costly and a fixed rate, with its guaranteed repayments, offers far more security. On the downside, a fixed rate is less flexible. Consumers usually cannot break the fixed term contract without incurring penalties while it is impossible to re-adjust payments or pay down the mortgage with a lump sum while on a fixed-rate contract.