Vol. 398 No. 6
17 Mr. Rabbitte asked the Minister for Finance the latest information available to his Department regarding the likely direction of interest rates during the rest of this year; if his Department have undertaken any assessment of the likely impact of the recently agreed arrangements for German monetary union on Irish interest rates; and if he will make a statement on the matter.
Interest rates are influenced by a variety of factors, including domestic economic conditions and movements internationally in interest and exchange rates. In the circumstances, it is not the practice to provide forecasts of future trends.
The economic and monetary terms of the draft treaty on the creation of a common German economic and monetary area were finalised only last week and remain to be ratified. Commentators vary their assessments of the implications of these terms for Germany and the rest of the EC. However, the German Government, supported by the Bundesbank, is confident that German economic and monetary union will not have adverse repercussions on interest rates in Germany nor, by implication, the EC.
I share the confidence of my German colleagues and would add that, in current circumstances, there is no reason to believe that, if there were an unexpected increase in German interest rates, it would lead to a corresponding increase in other EMS countries.
It is difficult to make forecasts. The Minister in his reply stated that the German Government are confident that the progress towards German unity will not affect interest rates. One would expect the German Government to say this to allay fears but would the Minister inform the House, apart from the statements of the German Government, what he has to go on trying to forecast what effect German unity will have on interest rates?
I have just returned from Washington where I attended a meeting of the World Bank and the IMF at which various views were expressed and discussions took place on the question the Deputy has just raised. It transpired that the spokespersons for the Bundesbank were surprised and rather annoyed that such pessimistic forecasts have been appearing consistently in various sections of the media in recent months. In their view there are no foundations for these. The Deputy will have noticed that in recent weeks some of our partners in the EMS, including the French and Belgian Governments, have begun to reduce their interest rates, albeit by small amounts, and this would not indicate that they expect the Germans to increase their interest rates.
Would the Minister not agree that we should set about reducing our interest rates which are altogether too high in real terms, that the differential between the rate of inflation and the rate of interest at 8 per cent or 9 per cent is way above what it ought to be and that this has resulted in real hardship being caused? What does the Minister intend to do about this?
As the Deputy and the House will appreciate, monetary policy is the responsibility of the Central Bank but I can inform the House that there have been much more favourable capital inflows in recent months and that reserves are in a much stronger position than they were. I, as well as every other Member in this House, would like to see interest rates being reduced but the instrument of interest rates seems to have a slightly different use to the one it used to have some years ago when it was used to bring down inflation. It now appears to have a dual purpose in that it is used to stop the flow of capital from one country to another. Therefore the sooner everybody we trade with within the Community are within the EMS the better as this will lead to stability.
