Dáil Éireann Debate, Thursday - 8 February 2018
126. Deputy Michael McGrath asked the Minister for Finance the impact of increasing oil prices on the economy; the mechanisms in place to tackle inflation while interest rates remain low; the risks to the economy and to competitiveness of increased inflation; and if he will make a statement on the matter. [6664/18]
View answerIn general, as an energy importer Ireland has benefitted from the steep fall in oil prices since 2014. While oil prices have picked up over the past couple of years and particularly in recent months, they remain well below their recent peak. Further, futures markets suggest that oil prices will remain subdued. However, if there was a rapid rebound in oil prices then it could pose a risk to the economy’s growth prospects. For example, higher oil prices would reduce consumer spending power and lower corporate profitability.
The pick-up in oil prices last year contributed positively to consumer price inflation. For example, the annual rate of inflation for the energy component of the Harmonised index of Consumer Prices (HICP) averaged 4 per cent last year. Despite this, overall HICP inflation averaged just 0.3 per cent last year, the fifth consecutive year of inflation below 1 per cent.
By contrast, inflation in the euro area as a whole, on a HICP basis, averaged 1.5 per cent last year. As a result, low inflation in Ireland has been contributing positively to Irish competitiveness. As part of Budget 2018, the Department of Finance forecast a moderate pick-up in HICP inflation to 0.8 per cent this year. While this forecast incorporated a lower assumed price of oil than currently prevailing, increased oil prices will impact inflation across all countries. As a result, inflation in Ireland is expected to remain below the euro area average and thus inflation developments should again contribute positively to Irish competitiveness this year. Inflation is therefore not considered a short-term risk at present. In fact, the challenge for the European Central Bank (ECB) in recent years has been that inflation in the euro area remains below its target. This is why the ECB has maintained a policy of low interest rates in recent years.
However, headline inflation developments are not the only factor contributing to competitiveness. We must be cognisant that favourable exchange rate movements can reverse, as can be seen for example in the strengthening of the euro against the dollar. In addition, excessive rent and house price growth are also a potential threat to competitiveness.
These factors have the potential to unwind some of the significant improvements in Ireland’s competitiveness in recent years. For example, the latest figures from the Central Bank of Ireland, show that Ireland's real harmonised competitiveness indicator (a widely used measure of competitiveness in Europe) has improved by 20 per cent between its peak in 2008 and December 2017.
These risks highlight the importance of managing the public finances in a prudent manner and maintaining competitiveness-oriented policies so that the Irish economy is in the best possible position to weather any shocks that may emerge.
