Interest rates are continuing on their upward trajectory. The increase yesterday by the European Central Bank means interest rates have risen from 2.5 per cent in the summer of 1999 to 4.5 per cent now and a further rise is likely later this year. Some forecasters estimate that rates will rise as high as 5.5 per cent towards the end of next year. However, borrowers should not worry overly much; even at that level, they would still be well below the rate which was in effect just months before the euro came into existence, when base interest rates were as high as 6.75 per cent.
There can be no doubt that if the Central Bank here still had control of interest rates they would be considerably higher. Policy-makers here would have moved earlier and more decisively to try to take the steam out of the property market and to slow the overall growth of the economy through substantially higher borrowing costs.
The ECB, of course, has considerations other than Ireland's growing economy and the booming housing market. It is unlikely that the gradual rises in European interest rates will have much discernible impact on the housing market or on the rate of credit growth here. Nonetheless the latest increase will be passed on over the coming weeks to borrowers and savers. Those who have taken out loans in recent months will face their highest repayments, but cannot complain that they were taken by surprise.
Those thinking of taking on new loans - and the financial institutions lending out the money - must take into account the impact of further likely rate increases on repayments in the months ahead. Ironically, the increase in rates will actually fuel further rises here in the consumer price index (CPI). This State is more reliant than most on short-term borrowing for mortgages and the inevitable mortgage rate rises will thus feed into the CPI. Analysts believe it could add about 0.2 of a percentage point to the inflation rate.
This will be unwelcome news for the Government and the Minister for Finance, Mr McCreevy, who are coming under pressure to substantially curb inflationary pressures. Inflation in July was running at 6.2 per cent - more than double the European average. The ECB, however, is operating to a different agenda. It is concerned to hold back inflation across the euro zone. Strong oil prices and the weak euro have combined to push up prices across the zone, with inflation now running at 2.5 per cent, well above the ECB medium-term target.
The one danger with this strategy is that the ECB may actually endanger economic growth in countries such as France and Germany. There had been some speculation before yesterday's announcement that the ECB might have pushed rates up by half a percentage point. It is good news that it did not. There are serious concerns that to have done so might well have jeopardised the German economic recovery.
Business confidence is already falling there and news yesterday that French industrial production was lower than expected rightly pushed the ECB into more cautious mode. That danger is the main reason that the euro has failed to respond to increasing returns on the currency. That in itself is heightening the inflationary concerns the rate rise is designed to combat, as import prices from the UK and the US remain high, fuelling higher prices.