THE markets will be looking to the powerful central banks of Germany and the US this week to see where key interest rates are now heading.
Tomorrow the spotlight will fall on the policy making US Federal Open Market Committee meeting to see whether an interest rate rise is needed to head off potential inflationary pressures in the US economy. On Thursday the focus will switch to the Bundesbank which has hinted that it is preparing to cut rates.
Meanwhile, Irish banks and building societies are still considering the timing of an expected rise in mortgage and other retail interest rates. Most analysts believe they will now await the outcome of these meetings before adjusting their rates.
With wholesale Irish interest rates stuck at just over 5.5 per cent for almost two weeks now, the financial institutions are expected to seek to add up to a half of one percentage point to their main variable interest rates and deposit rates.
If the Bundesbank leaves it's rates unchanged and the German currency gains ground on the foreign exchange markets, NCB economist, Mr Dermot O'Brien says there is a risk that Irish rates may even rise to higher than expected levels.
Over the weekend, commentators predicted that the US Federal Reserve will leave its key rates unchanged tomorrow. While a surprise hike in US rates is likely to delay any move in German rates, they say.
Mr O'Brien says the FOMC decision may have some influence on the Bundesbank's actions. "If US rates are raised, there may be more chance of Bundesbank inaction since a stronger dollar would relieve pressure. Conversely, inaction from the FOMC may increase the likelihood of a cut in German rates based on currency considerations.
The Central Bank of Ireland has indicated that it would be happy to see bank and building society rates rise because of its concerns about inflationary pressures in the economy. Given its failure to take any action in the money markets to put further pressure on rates last week analysts have begun to questions the bank's motives.
They now believe the bank's primary concern is the management of the Irish currency and net the rapid rise in credit growth.
Meanwhile, for the markets, the Bundesbank meeting is probably more of a focus than the Fed because very few people expect the Fed to move, according to Mr Adrian Schmidt, international economist at Chase in London.
Just a few weeks ago, the market regarded Federal Reserve tightening as a foregone conclusion. But a raft of US data showing subdued inflationary pressures provoked a turnabout and the market is now braced for no move this week. However, the market remains vulnerable if the Fed confounds expectations and opts for a pre-emptive strike against inflation.
"It's a closer call than people suggest" Mr Schmidt said, although he added that he did not expect a rate hike.
The Bundesbank is the central bank really setting market pulses racing. Its chief economist Mr Otmar Issing said the German economic recovery was not so robust as to be sure it would continue.
His comments came just a day after a Bundesbank report held out the prospect of an easing in its key short term Repo rate, saying the bank would continue to monitor money supply to assess scope for lower rates.
"They seem to be talking rates down in a big way, so that would lead you to believe they might do something," said Ms Phyllis Reed, BZW European bond strategist.
"But using Bundesbank comments as a guide, to rate policy can be a dangerous game.
