Rates warning on house loans

FAMILIES and investors taking out house loans should factor in a 1.5% hike in interest rates by the end of 2004, a leading economist cautioned last night.

The chief economist at Friends First Jim Power also predicted the economy would grow by 5% this year.

That is the trend rate of growth forecast for Ireland Inc for the next several years.

The economy is back where optimistic forecasters said it ought to be after a few years that saw the Tiger killed off, according to Jim Power, chief economist, Friends First.

Given the difficulties of the last few years the economy’s performance was impressive, suggesting more built-in flexibility to adapt to the changing global circumstances that many suspected, he said.

Housing completions will hit at least 72,000 this year and possibly 80,000.

But there isn’t a bubble in sight as the new smaller tiger starts to purr with confidence.

Interest rates will stay low, but Mr Power has warned those taking out home loans now ought to calculate in a 1.5% hike in Irish rates by the end of 2004.

Given the poor state of the European economy he expects the current level of rates to hold for the rest of the year.

On the broader global front the US is due a strong performance this year.

Post the November presidential election there will see some reversal in 2005, but overall the outlook for the US is reasonably good given the concern over deficits and the ending of interest rates that hit 60-year lows across the globe.

In as strong message to the Government, Mr Power warned against the dangers of soft option economics by the Finance Minister who steps into the shoes of Charlie McCreevy.

If the tight controls on spending are maintained the new minister will have scope to fully index tax bands and to increase spending in “politically sensitive areas”.

That is provided the tight current spending policy is maintained, he said.

By the end of 2004 the Government’s coffers ought to be in a healthy state thanks to buoyancy in the economy and higher numbers at work. Initially the deficit was put at €2.8bn for the year, however, it is likely to be less than half that number at this stage in the year, said Mr Power.

Commenting on the political fallout from the European and local elections, Mr Power said the Government would be making a big mistake if it started throwing money at sensitive political areas based on feedback on the door steps.

“The policy of low taxation has been key for the growth of the economy and needs to be maintained if the Government is to continue to generate the level of income growth necessary to bring public services and infrastructure up to acceptable standards”, he said.

“A policy of sharply increased spending would be a major policy mistake that would have negative longer-term repercussions on the economy.”