Economics: Irish interest rates are at a 50-year low. The repo rate, which sets the floor for borrowing rates, is 2 per cent and most mortgage borrowers are paying around 3.6 per cent for loans, with some paying even less by availing of cheaper discounted rates designed to attract first-time buyers, writes Dan McLaughlin.

For savers, the interest rate environment is less attractive, of course, and most deposit rates are extremely low and well under the inflation rate, implying that €100 saved today will buy less in a years time.

Interest rates tend to move in cycles, in turn reflecting cycles in economic activity and, on those grounds, most commentators would argue that the next move in Irish interest rates will be upward, although disagreeing perhaps as to the timing.

The financial markets certainly thought so until a few months ago. In November, for example, the market was pricing in a European Central Bank (ECB) rate rise in the second quarter of 2004, and an end of year repo rate of 2.75 per cent.

The euro's appreciation on the foreign exchange markets has changed expectations, however, and the markets are now expecting only a quarter-point rate rise in 2004 - and then only in the final months of the year.

Indeed, some analysts go further, arguing that the ECB may well cut rates again, in a bid to stem the euro's rise.

This view may puzzle readers who remember back to 2001, when some were also calling for an ECB rate cut, this time to boost the euro, which at the time was trading at 83 cents against the dollar.

The truth is that the direct impact of an interest rate change on a currency's foreign exchange value is difficult to predict, which provides support for the ECB's reluctance to use interest rates as a weapon to directly target the exchange rate.

Rather, the euro is seen as only one factor, albeit an important one, affecting growth and inflation in the euro area and, as such, the ECB will only change interest rates if developments in the foreign exchange market are significant enough to change the ECB's outlook on inflation.

Unfortunately, our knowledge of the ECB's views on the inflation outlook leaves something to be desired, particularly relative to the Bank of England, which is much more open in its interaction with the public.

The latter publishes detailed forecasts of growth and inflation every three months, for example, including a quarterly projection stretching over a two-year horizon.

Consequently, events can be judged against those forecasts, providing markets with a clear signal as to any likely rate change. In recent months, for instance, growth in the UK has emerged ahead of the Bank of England's forecasts, which has prompted two quarter-point increases in interest rates, neither being a shock to market observers.

Minutes of the meetings of the Bank of England's monetary policy committee (MPC), which actually sets interest rates, are published two weeks after the event, which also allows one to monitor the key arguments driving the interest rate debate. The votes of the nine-member committee are also published.

The ECB argues that it too communicates regularly with the public by publishing a monthly bulletin and holding a monthly press conference, following the monetary policy decision.

Both are formulaic, however, usually repeating mantras such as "rates are appropriate", which is self-evident or otherwise they would have been changed.

Market analysts scan the texts for any change in terminology or emphasis, much like Kremlinologists use to study Russian official publications for clues as to changes in the pecking order of the Politburo, which itself implies a less-than transparent process.

The ECB's economic forecasts are also published, but only twice a year, and then in a form which is far from instructive.

The most recent forecast, which was published in December, projected inflation averaging between 1.3 per cent and 2.3 per cent in 2004, for example. The market simply takes the central point of this range and, therefore, assumes the ECB expects inflation to average 1.8 per cent in 2004.

The dovish case for interest rates rests on the fact that this forecast was based on an average exchange rate of $1.17 so, if the ECB decides that the average exchange rate will be higher, it would result in a downward revision to both growth and inflation.

Against that, oil prices are also higher than the ECB expected and the global economy may be stronger than it anticipated. Hence, it would require a much higher euro foreign exchange rate than the current $1.24-$1.29 range to prompt a pronounced change in ECB thinking on the growth and inflation outlook. However, the uncertainty about the foreign exchange trend probably means interest rates are on hold longer than most thought a few months ago.

I would still bet on an upward move in 2004, based on the momentum of the global economy, albeit pushed into the third quarter of the year.

Dr Dan McLaughlin is chief economist with Bank of Ireland