Interest rates are set to rise by another full percentage point and possibly more within the next year.
The upward momentum gained pace yesterday as the European Central Bank's latest quarter of a percentage point increase failed to halt the decline in the euro which hit new lows against the dollar, sterling and the yen.
Yesterday's increase is likely to be passed on in full by mortgage lenders - just as last month's rise kicks in for May repayments. The Irish Permanent is expected to announce a mortgage rate rise next week to more than 5 per cent for the first time since last August, with the other lenders quickly following suit.
As a result of yesterday's increase, the repayments on a typical £75,000 mortgage over 20 years will rise by £10 to just over £500 a month. This compares to £450 last November.
Interest rates are now expected to rise by around another 1 percentage point this year. Yesterday's rise - the third in as many months - saw the euro falling further in value, with no end in sight to its decline.
If the ECB raises official rates - now at 3.75 per cent - to 5 per cent, the repayment on a £75,000 mortgage is likely to be £543 by the end of the year.
According to Mr Colin Hunt, chief economist at Goodbody Stockbrokers, interest rates may rise as high as 5 per cent by the end of 2000 compared to a low of 2.5 per cent only last October. "The German economy would not be able to cope with higher interest rates than that unless the politicians start into some serious structural reform," he said. "But another rise of up to half a percentage point is possible in May."
Others point to a likely interest rate of closer to 6 per cent if economic growth in the euro zone continues to pick up and the euro to fall. Yesterday's rise did nothing to support the currency, which lost some 1.5 cents following the news. It was trading at $0.9088 in Europe having traded as low as $0.9060 from $0.9231 on Wednesday and at 57.58p against sterling from 58.41p.
Raising interest rates should support a currency, but the money markets are worried that core inflation across much of Europe does not warrant such frequent rate rises. The ECB has put rates up some 1.25 percentage points over the past year, far higher than many expected.
According to Mr Pat O'Sullivan, economist at AIB, in the next few days the euro could fall as low as 90 cents or below. "There is nothing much which is likely to happen which will help," he said. "Even US figures, which were slightly worse than expected, failed to boost the euro for more than about 10 minutes."
He added that he would not be surprised if the currency sank to between 85 cents and 89 cents. However, a fall below that level would probably mean the ECB would be forced into concerted intervention with the US Federal Reserve and the Bank of Japan to boost the currency.
Continuing rate rises in the US are also keeping the pressure on the ECB. Analysts are divided over whether the next rise there will be a quarter or a half percentage point. Either way, the higher returns paid for dollar rather than euro assets will be maintained and possibly strengthened.
Also the line of negatives operating against the euro is quite extensive. These include Greece's proposed entry to the single currency and subsequently that of Eastern European countries such as the Czech Republic and Poland; the political situation in Austria; a likely vote by Denmark to stay out of the single currency; and no signs of Britain joining. According to Mr Hunt, structural reform, particularly in Germany, and a more proactive role for the ECB chief, Mr Wim Duisenberg, are also vital if the decline is to be reversed.