There is further strong evidence that interest rates are set to fall in the New Year, following substantial declines in wholesale money market rates.
Many of the big Irish institutions are expecting that interest rates will start to weaken as early as January. As a result, the three-month wholesale rate has fallen by almost half a percentage point over the past couple of days.
The key one-month rate has also fallen, but not by as much. Mr Oliver Mangan, chief economist at AIB Capital Markets, said the Central Bank is still controlling the short term rates.
According to Mr Dermot O'Brien, chief economist at NCB Stockbrokers, the Bank is still providing liquidity to the money market.
The rapid decline in longer term wholesale rates was sparked by increased speculation in the market that a revaluation of the pound will be ordered within weeks of the New Year.
This speculation underlined a wave of buying in the bond market, with some of the big institutions said to be picking up whatever is on offer and driving rates down. On the money market the three-month rate has fallen 6.25 per cent to 5.75 per cent over the past few days.
According to Mr Mangan, the Central Bank will start to cut interest rates in January or February, but the first mortgage rate cut may not happen until March.
In recent weeks, the Bank has moved to a continental style "repo" or repurchase type system in the money markets. This will allow it to gradually cut wholesale interest rates by as little as one tenth of a percentage point at a time.
Yesterday, the key one-month was trading at 6.19 per cent and rate cuts are not expected until it trades below 6 per cent for a number of weeks, or the Central Bank gives a clear indication that it wishes to see rates to retail borrowers move lower.
Mr O'Brien insisted that the Central Bank will be very reluctant to move until the currency situation is "sorted out" or revalued.
This will happen, according to Mr O'Brien, by February or March. Although, he admits it could easily happen earlier.
There is speculation that revaluation of the pound's central rate in the ERM currency may be signalled along with the first rate cut, partially to ease the criticism which the Government could face from the farmers' and exporters' lobby groups for such a currency move.
Mr O`Brien added that the Bank will be extremely reluctant to cut rates before a decision is made on the currency, for fear of sending a mixed signal to the market.
