While there is little doubt in anybody's mind that the interest rate cycle has definitively turned, there is less certainty over where mortgage interest rates will be in two to three years' time.

Most analysts agree the European Central Bank's (ECB) recent decision to raise rates by a full half percentage point, rather than a mere quarter, means the next move on rates is not likely to come until well into next year. Bloxham Stockbrokers believes an aggressive tightening is not on the cards even then, as euro zone inflation should remain well behaved.

It expects it to remain below the ECB's two per cent upper target over the next year, kept down by forces such as the lower prices resulting from deregulation of industries such as telecommunications and electricity.

What happens further down the line is less clear but most economic observers believe euro interest rates are unlikely to rise to the heady 14 per cent heights of the 1993 currency crisis. They are not even expected to revisit the slightly lower levels that were once the norm in the Irish market.

"We are satisfied that a profound change in the interest rate regime has occurred in recent years," Davy Stockbrokers says in Solid Foundations, a recent report on the Irish housing market.

"Specifically, the new regime is characterised by very much lower interest rates and interest rate expectations than the old one and by a perception that interest rate volatility will be much lower going forward than in the past."

Davy points out that on an annual average basis, variable mortgage rates in the Republic fell from 9.6 per cent to 7.1 per cent between 1993 and 1998 and will have declined further to 4.9 per cent for 1999. And the broker believes that future rate rises will be modest.

"The most likely trajectory for rates is one that will see them rise by no more than a further 1.5 to 2 per cent by the end of 2002," the report says. Of course, such forecasts assume there is no major, unexpected economic shock in the euro zone or the world economy in the years ahead.

Davy is also optimistic about the likely developments on the margin front from a consumer point of view, if not from the standpoint of the financial institutions.

"While volume growth looks set to remain buoyant over the next few years, it looks like they will have to survive in an era of lower returns," the report says.

Bank of Scotland's recent arrival in the market brought to an abrupt end a period in which the established mortgage lenders managed to widen their mortgage spreads as interest rates fell, compensating themselves for lower deposit margins.

Davy estimates that of the 3.8 percentage point reduction in Irish interest rates, mortgage lenders had typically passed on just 2.25, widening their margins by up to 1.55 percentage points before the British bank entered the market. Now competition should keep them on their toes.

Davy expects margins at lenders such as Irish Permanent, First Active and EBS to remain broadly stable this year at 2.18 per cent compared with 2.14 per cent in 1998.

But from next year, the major lenders are likely to see a sharp contraction in the difference between the cost at which they borrow funds and the rate at which they lend them on.

"Next year, an oversupply of mortgage finance, exacerbated by Bank of Scotland's market entry, will exact a heavy toll," Davy says. It is forecasting a sharp reduction in overall margins to 1.83 per cent from its 1999 estimate of 2.18 per cent.