Dáil Éireann díospóireacht -
Tuesday, 5 Nov 1996

Vol. 471 No. 1

Written Answers. - Exchange Rates.

Joe Walsh

Ceist:

51 Mr. J. Walsh asked the Minister for Finance if the Central Statistics Office has been able to determine the average impact on the consumer price index of a movement in the Irish pound and sterling exchange rate in either direction. [19864/96]

Minister for Finance (Mr. Quinn)

The Central Statistics Office's work in relation to the consumer price index comprises the collection, collation and dissemination of information on the level of prices in Ireland, and the rates at which those prices are changing. This work involves comprehensive field surveys and sophisticated statistical analysis, but it does not extend to investigating why prices have changed, or why they may change in the future. In this respect, I understand that the Central Statistics Office's position is no different from that of the generality of national statistical institutes which compile official inflation figures in other countries.

Exchange rates affect consumer price inflation, especially in open economies such as Ireland. Other things being equal, an exchange rate depreciation will put upward pressure on inflation, while an exchange rate appreciation will have the opposite effect. Where exchange rate change is being related to inflation change, the usual measure of exchange rate movement is the trade-weighted effective exchange rate, rather than any particular bilateral exchange rate. As its name implies, this index assigns a weight to the Irish pound-sterling exchange rate which is broadly proportionate to the share of total Irish trade which is conducted with the United Kingdom.

The effect of exchange rate change on inflation is complex, and quantifying the impact of exchange rates on inflation, particularly over a short period of time is difficult. In the first instance the pass-through effect of an exchange rate change between the Irish pound and some other currency could be seen in import prices from that country, which would tend to rise in Ireland in response to an exchange rate depreciation, and to fall in response to an exchange rate appreciation. Taking the depreciation case for illustration purposes, the resultant import price rise would prompt Irish economic agents, where possible, to source cheaper products elsewhere, either from the domestic market or from countries against whose currencies our exchange rate had not depreciated. Where competing domestic or overseas suppliers existed, they would have scope to increase their market share in Ireland by leaving their prices unchanged while equivalent imported products, from the country against whose currency the Irish pound had depreciated, were rising. A further complication would be the extent to which the bilateral exchange rate movement reflected intrinsic Irish pound weakness, or generalised strength of the other currency.

These and other factors mean that the links between exchange rates and inflation are complex, and this is reflected in a variety of viewpoints on the importance of particular bilateral exchange rates such as Irish pound-sterling and Irish pound-deutschmark. In the case of Irish pound-sterling, it is sometimes asserted that the actual impact on inflation is greater than sterling's weight in the effective exchange rate index would imply, usually on the grounds that a high proportion of goods imported from the UK are consumer goods rather than capital goods or materials. This view is disputed by other authorities however, who cite the contrasting evolution of inflation in Ireland and the UK to argue that the sterling rate is not significantly more important than its effective exchange rate index share would indicate.

In practice, it is extremely difficult to isolate the specific influence of the Irish pound-sterling exchange rate as distinct from all the other factors which affect inflation. These include the advent of the Single Market, shifts in trading patterns, changes in the composition of UK manufacturing, and structural changes in retailing.