Written Answers. - Economic and Monetary Union.
Brendan Howlin
Question:
25
Mr. Howlin
asked the
Minister for Finance
his views on whether the reduction of European interest rates is appropriate to the Irish economy at this time; his further views on whether the reduction entails an inflationary risk for Ireland; and the measures, if any, he envisages to counteract any risk.
[13842/99]
Minister for Finance (Mr. McCreevy): As the Deputy is aware, with the advent of economic and monetary union interest rates will be set by the European Central Bank taking account of conditions across the euro-zone. In the event that economic cycles may not be wholly synchronised, this complicates the conduct of monetary policy in achieving price stability in all member states.
As regards the appropriate interest rate for the Irish economy at this stage, all the indicators suggest that growth remains strong. As I have outlined on a number of occasions the rapid economic growth we have experienced is giving rise to some pressures. There have been very significant increases in the price of housing which remain a concern to the Government. There are also emerging skills shortages in the labour market which have led to some wage inflation, most notably in sectors such as construction and IT. These trends are being monitored closely given the importance of appropriate wage developments in supporting the economy's underlying competitiveness.
Given the economy's rapid growth, and the emerging pressures in the labour market, a period of more moderate growth would be welcome. In all probability, this latest reduction is likely to give some additional boost to already buoyant domestic demand.
However, it should be noted that despite these concerns inflation remains low. As measured by the consumer price index, inflation was 1.4 per cent in the year to April. This represents a significant fall from the peak of 3.2 per cent in August last, although part of this fall is due to the impact of lower mortgage interest rates.
With Ireland's participation in EMU there is now a greater onus on both budgetary and incomes policy to support stable prices and non-inflationary growth. Keeping inflation low was one of the key objectives of the 1999 budget. While delivering on promised tax reductions and addressing social and infrastructural needs, the budget also forecast a further significant general Government surplus and a fall in the debt-GDP ratio. By running a significant surplus, the Government sought to avoid adding unduly to domestic demand. This prudent approach to budgetary policy should help to contain emerging price pressures.
Moderate pay increases are also essential if price stability is to be maintained. The next pay agreement faces a crucial challenge in maintaining competitiveness. This is a challenge for all of the social partners and represents a major element of Government policy.
