INTEREST RATES SET TO RISE IN EARLY 2006 ACCORDING TO BANK OF IRELAND CHIEF ECONOMIST

All indicators point toward a quarter point rise in eurozone interest rates in the first three months of 2006, according to the latest Bank of Ireland Global Markets Economic Research Bulletin.

Writing in this month's Economic Bulletin which was published today (26th October 2005) Dr. Dan McLaughlin, Chief Economist, Bank of Ireland said that although rates had remained unchanged for 28 months at 2% the ECB's rhetoric had changed of late and was now pointing toward a rate hike.

"Two new developments account for the change in tone from Frankfurt alongside the continuation of an upward trend in mortgage lending. The latter is now growing at an annual pace of some 10.5%, which implies an average nearer 15% if one excludes Germany where lending growth is weak. Moreover, monetary growth has also accelerated strongly, exceeding 8% in August, which is worrisome for some in the Bank's Governing Council, as they fear that excess liquidity will eventually spill over into higher inflation. The headline inflation rate jumped to 2.6% in September, the highest reading since early 2002 on the back of the recent spike in oil prices. In the absence of a short fall in energy costs inflation may now continue to exceed the 2% target for months to come', said Dr. McLaughlin.

He added that although the ECB can do nothing about an energy rise in the CPI, it is also concerned about 'second round' effects such as wages and other cost increases as a result of the spike in oil prices. Consequently, he points out that the recent statement from the Bank indicates the need for 'strong vigilance' to contain inflation which suggests a move to a tightening bias.

"This move to a tightening bias could also be supported by recent signs of stronger than expected economic growth in the eurozone which combined with the marked acceleration in headline inflation and buoyant monetary growth, could provide further ammunition for the hawks on the Governing Council. The market has already adjusted its expectations on the timing of a rate rise, with a quarter point move now seen in the first three months of 2006, a marked change from the situation over the summer, when tightening was not envisaged until 2007. Longer term rates also reflect this shift in expectation, with three years now up at almost 2.9% from a low of 2.30% in early July", said Dr. McLaughlin.

He concluded that: 'with rates likely to rise, retail borrowers should consider the option of fixing, with fixed mortgages currently available at under 3.75%".

Ends
For reference:

Dr Dan McLaughlin
Chief Economist
Bank of Ireland
Tel: 01 609 3326

Damien Daly
Head of Marketing
Bank of Ireland Global Markets
Tel: 01 609 3221

Anne Mathews
Media Relations Manager
Corporate Communications
Bank of Ireland Group
Tel: 01 604 3836

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