THEY will not be popping champagne at the Central Bank at the prospect of lower interest rates. The German move will inevitably lead to lower interest rates in Ireland - Ulster Bank moved quickly to cut its rates last night - which is not what the Central Bank would want at a time of strong economic growth.

However, as we like to see ourselves as being linked to core European interest rates set by the Bundesbank, the Central Bank will probably reduce its official interest rate, possibly today.

The Central Bank would prefer to hold interest rates where they are rather than risk overheating the housing market and fuelling inflation through a further reduction. It is not currently overly concerned about inflation, but has warned several times it will not hesitate to increase interest rates if it discerns inflationary pressures.

But this is something of an empty threat. For it is the Bundesbank, rather than the Central Bank of Ireland which is in control of Irish interest rates. This poses a dilemma for the Irish authorities, as German monetary policy is being set to suit an economy in the doldrums, while the Irish economy is booming.

Despite that, the Central Bank has little option but to go along for the ride towards lower interest rates. Even in the unlikely event of the Central Bank not reducing its interest rates, competitive pressure is already leading them lower.

After all, two institutions - National Irish Bank and TSB - reduced their rates back in February in expectation of the German cut and Ulster Bank followed yesterday. With wholesale rates edging below 5 per cent yesterday, it will not be long before the rest will follow.

All lending and deposit rates will not fall by a full half of a percentage point, as shown by the Ulster Bank move yesterday. For one thing, basic deposit rates are already as low as 0.25 of a point and cannot fall anymore. So what the financial institutions will do is reduce some borrowing rates by more than others, while also edging down some of their deposit rates.

One consolation for the Central Bank is that there is no clear signal of significant inflationary pressure in the economy. True, house prices are rising fast, but this only poses a real inflationary threat if it feeds into a general feel good factor and a spending boom.

Borrowing from banks and building societies is also rising rapidly, although much of the money is going towards investment which will increase the economy's productive capacity rather than to spending. Fortunately the recent growth in the economy has been based largely on the resulting investment and improvements in the economy's supply side.

The bank will also be more relaxed about the value of the pound in the ERM than it has been for some time. While still the weakest currency in the ERM, it is back within the old 2.25 per cent band. The bank would probably be concerned that not cutting interest rates could push the Irish currency higher against a weakening sterling, causing renewed complaints from Irish business.

The latest strength of the pound has been based not only on sterling wobbles but also on heavy demand from overseas investors buying the currency in transactions related to purchases of government gilts. Ireland has been one of the markets to benefit from renewed optimism about EU economic and monetary union, which was added to by last week's meeting of finance ministers in Verona, Italy.

The theory is that, if EMU goes ahead with a revived ERM for those not joining, long term interest rates across Europe are set to fall much closer to German levels.

The irony, of course, is that the latest events highlight one of the difficulties of monetary union, which is that policy set at the centre will often not suit all the member states. It is not something which will worry Irish borrowers as their repayments fall again.