Dáil Éireann díospóireacht -
Thursday, 18 Apr 1991

Vol. 407 No. 2

Ceisteanna—Questions. Oral Answers. - Interest Rates.

Pat Rabbitte

Ceist:

1 Mr. Rabbitte asked the Minister for Finance if, having regard to his recent comments following the publication of the official tax and spending figures for the first quarter, that he would like to see the Central Bank make a more substantial cut in interest rates and the disappointment he expressed when one building society reduced their deposit interest rates without simultaneously reducing mortgage interest rates, he intends to take any legislative or regulatory powers to control or monitor interest rates; and if he will make a statement on the matter.

Minister for Finance (Mr. A. Reynolds)

I have no plans to alter the existing arrangements governing interest rates. The Central Bank of Ireland has statutory responsibility for the management of Irish interest rates. A similar position obtains in many other countries. This is based on the principle that interest rates should be determined by monetary policy considerations. In carrying out its functions the bank must take into account a wide range of factors including the necessity to maintain a firm exchange rate within the EMS, the level of the external reserves and the flows of funds in and out of the country.

Mr. Rabbitte

Would the Minister agree with the general perception that he is now seen to be publicly at loggerheads with the Governor of the Central Bank, that he seems to be entirely ineffectual in giving effect to his point of view, which would appear to suggest that there ought be a greater reduction in interest rates than has been the case and that the public, mortgage holders and businessmen would tend to agree with that view? Can he explain to the House how it is that, since there are regular meetings between the Standing Committee of the banks and the Board of the Central Bank, when it is suggested by the latter that there should be a reduction of 0.25 per cent in the lending rate, subsequently we hear such comments from the commercial banks as that the increase should have been 0.50 per cent or greater? Does the Minister intend——

An Ceann Comhairle

I rather expected brevity, Deputy.

Mr. A. Reynolds

I cannot accept what the Deputy says, that I am at loggerheads with members of the Board of the Central Bank or its Governor. As I am sure the Deputy knows, section 6 of the Central Bank Act, 1942 sets out the bank's general function — to safeguard the integrity of the currency and to ensure, in what pertains to be control of credit, that the constant and predominant aim shall be the welfare of the people as a whole. The fact that the Central Bank has statutory responsibility for monetary policy has served us well in the past. I am not in favour of changing the position. It is true that on one occasion recently I felt it necessary to express disappointment that a reduction in deposit interest rates had been notified by a building society without a similar reduction in lending rates. That position was quickly corrected by the building society in question. What was clear from that announcement was that the building society in question, one of the largest in the country, was intending to embark on a course of reducing deposit rates without effecting a corresponding reduction in lending rates.

Mr. Rabbitte

Does the Minister intend doing anything about the rate of outflow of funds from this economy which is contributing to the present high level of interest rates? Would he comment on why it is that this country has the highest real interest rate within the EMS grouping? Having regard to our link with the German economy and the refusal of the German economy to tackle their interest rates, other than by monetary means, would he say whether we are likely to continue to experience this problem?

Mr. A. Reynolds

There is a later question on the Order Paper from Deputy Noonan (Limerick East) in relation to whether we have the highest level of interest rates within the European Community. On the matter of the free flow of funds out of this country, as the House will be aware, we are moving to a position of free capital movements throughout the Twelve member states of the Community by 1992. It is true that we experience outflows and inflows and that we shall continue to have such flows which may or may not accelerate in 1992. It is a question of the overall economic management of our economy — and whether the requisite confidence obtains therein — where investors invest their money. At present we are enjoying a considerable flow of funds in our favour. Nevertheless, from time to time, for commercial and business reasons, including the spread of portfolio risk, Irish pension fund managers and others have spread some of their funds in international equities, in Government stocks or whatever. That is a matter for them. That causes certain outflows at certain times when, for example, there is a wide differential between the Irish punt and sterling when some people buy forward in order to protect their profit and loss accounts. All of those are commercial factors. But the Central Bank take into account all the factors I have outlined here and will continue to do so.