Irish interest rates are now likely to start falling shortly towards German levels, with the president of the European Central Bank (ECB) indicating clearly yesterday that he expected an early reduction here.
The president, Mr Wim Duisenberg, indicated yesterday that convergence in interest rates in the states heading into monetary union should happen gradually in the weeks ahead, rather than being delayed to the last moment.
Mr Duisenberg gave the clearest message yet from the ECB that it expects base interest rates in the euro zone to start at the current Franco-German levels of around 3.3 per cent and that those states - such as Ireland - who had rates well above this level should start reducing them soon.
" There will have to be movement," he told the European Parliament. Rates will also have to fall in Italy, Spain and Portugal.
Market analysts are now expecting the first cuts in the Central Bank's official lending rate at the beginning of October - at the latest - after Mr Duisenberg ruled out a last-minute convergence of interest rates across Europe - which would have meant a very sharp fall in Irish rates in December.
"We do not see convergence on December 31st as possible," he said, saying that policymakers instead favoured a gradual convergence of rates in the months ahead.
He also confirmed that it now appeared that interest rates in the new euro zone would converge to the levels now prevalent in the core EU members - such as Germany, France and Belgium - meaning that the rate at which the Central Bank here supplies funds to the money market - 6.19 per cent - will fall to the current levels of around 3.3 per cent prevalent in these member states.
The Central Bank had hoped for some increase in continental EU rates, to allow for a smaller reduction here, but the slowdown in the international economy means that this will not now happen, meaning a sharp drop in Irish interest rates. However both Mr Duisenberg and the Bank of France governor, Mr Jean-Claude Trichet, yesterday appeared to rule out any further reductions in core European interest rates.
Also, the ECB chief and senior US central bankers ruled out a co-ordinated cut in rates across the industrialised world to boost equity markets and boost the global economy.
However senior Federal Reserve Board member, Mr William McDonough, did indicate that he saw lower US interest rates as possible.
Mr Jim Power, chief economist at Bank of Ireland, said the comments from Mr Duisenberg were a sign of concern in Frankfurt - the ECB headquarters - that Ireland should soon start to reduce interest rates. Otherwise they may fear that the pound could come under speculative attack in the coming weeks - as the Danish krona has done over the past few days.
"The very fact that the krona has been volatile shows how volatile things are and the pound could come under attack, as it stands out with the much high rates of interest prevailing here," he said.
"The ECB is very keen that the entire euro project proceeds as smoothly as possible. They are looking for convergence and can see no reason to destabilise the whole project."
Market analysts believe that interest rate cuts are likely to start early next month.
Speaking to the newspaper, Die Welt, Mr Duisenberg also insisted that the single currency zone would prove immune to the economic viruses currently circulating the globe. He added that the crisis would slow growth in the 11 euro countries but only marginally.
However, in comments that will further dampen hopes of co-ordinated interest rate cuts by the leading economic powers throughout the world, he insisted that the bank does "not see a recession coming".
Before the various crises emerged, the 11 euro countries were expected to grow more than 3 per cent in 1999. That was no longer likely, but growth would be only a few decimal points lower, Mr Duisenberg said. "Please don't panic yet," he said. "There will be some slowing down but there will be growth."
