asked the Minister for Finance if he is aware of the fall off in investment confidence in Irish business arising from the divergence in value between the punt and the pound sterling.
11.
Ceisteanna—Questions. Oral Answers. - British and Irish Currency Divergence.
10.
asked the Minister for Finance the assessment, if any, made on the effects on industrial and business interests resulting from the divergence in value of the punt from the pound sterling.
12.
asked the Minister for Finance the proposals, if any, to hold consultations with Irish business interests to assess the impact of the pound sterling/punt relationship.
With the permission of the Ceann Comhairle, I propose to take Questions Nos. 10, 11 and 12 together.
I am not aware of a fall-off in investment confidence, or of any significant adverse effects on industrial and business interests, as a result of the present divergence in value between the Irish and British currencies. In fact, available information indicates that so far this year investment has been very buoyant, indicating a continuing high level of confidence in the economy. While the appreciation of sterling vis-à-vis the Irish £ may lead to an increase in the cost of some imports, it should in general be beneficial for firms that export to Britain or Northern Ireland or whose products are competing with British goods on the home market. I have not received any request from organisations representing Irish business interests for consultations on this matter. The implications of exchange rate changes are, of course, kept under review by my Department and by the other Departments concerned.
Will the Minister agree that as so many of our exports to the UK and other markets are composed of raw materials originally imported from the UK there is quite an appreciable addition to domestic inflation as a result of the growing divergence between the Irish £ and the British £? Further, will the Minister agree that in the event of the divergence becoming even more marked, that is, the Irish £ being valued at 90p in relation to the British £, the effects here will be very extreme indeed and must lead in time to great difficulties with regard to the competitiveness of Irish products?
No. In what he has said the Deputy is assuming that the divergence between the two currencies will necessarily contribute to inflation here. That is not necessarily so.
Not necessarily but very likely.
It could be, but it is not necessarily so. As I have indicated, the competitiveness of Irish industrial goods in the UK and on the home market should be improved as a result of the divergence. The non-appreciation of the Irish £ in line with sterling has helped to safeguard our competitiveness in third country markets, giving us some advantage over the UK in those markets. The degree to which these advantages will be offset by increases in the cost of imports from the UK will depend on the extent to which British producers are able to maintain the expected price denominated in sterling. As I have told the Deputy, it would be a mistake to assume that the divergence which has taken place to date will necessarily lead to increased inflation here.
In the short-term it appears we must look forward to a continued depreciation of the Irish £ as against the British £.
I am advised I should not speculate on the movement of currency of another country.
Is it not the case that, because of the exchange controls introduced last December and the divergence between the Irish £ and sterling, more money is being borrowed on the Irish market than was the case previously because sterling is more expensive for Irish borrowers? Does this not have the effect of reducing the amount available for investment here? Does it not also have the effect of pushing up interest rates with a subsequent effect on investment in the second half of this year?
The movement of interest rates is worldwide. As the Deputy is aware, interest rates had increased in each of the EEC countries within the past few months because they were reflecting world interest rates. It is true that certain borrowings have taken place here which prior to the break with sterling had taken place in London. On the other hand, the matter is not quite as straightforward as that because there are facilities in certain circumstances in countries that are trading with Britain enabling them to borrow in Britain despite exchange controls.
There are also other developments in relation to the market which counteract the effect the Deputy indicated. I cannot say at this stage whether the net effect of these various factors is to have reduced the amount of money available for borrowing—I forget what phrase the Deputy used but I think he means the private sector generally, and I cannot say if that is correct. As the Deputy will also appreciate, especially from certain announcements by the Central Bank, the matter is further complicated by growth in credit beyond the lines laid down by the Central Bank. But I have no reason to believe that there is any serious liquidity problem arising as a result of the break in the link with sterling.
I am not saying that it is directly as a result of the break in the link with sterling. It is because interest rates have gone to such an extent here that there is lack of confidence on the part of investors about the future, and they are reluctant to invest. The Minister says that interest rates are going up world wide—that is correct—but they are going up from a very much lower rate. We are, I think, 2 per cent above the English lending rate in this regard. Therefore, money which previously could have been borrowed at cheaper rates in London—even though it is not prohibited to borrow in London—because of the difference in the value of the pounds, costs more to repay, and that differential is wiped out because of the revaluation of the currencies.