Dáil Éireann Debate, Wednesday - 23 June 2004
5 Mr. Eamon Ryan asked the Minister for Finance the short-term threats that are posed to the economy here by rising inflation in the United States and a recent increase in interest rates in the United Kingdom. [18732/04]
Amharc ar fhreagraIn general, if higher inflation gives rise to higher interest rates it is likely that this would have some negative impact on US and UK growth and imports. However, there are many other factors which could offset or add to the adverse effects, such as changes in exchange rates, oil prices and consumer confidence.
US inflation was 3.1% in May 2004, up from 1.9% in January. The increase was partly due to the increase in oil prices. However, core US inflation, which is inflation excluding oil and food prices, was much lower, at 1.7% in May, less than half the rate of total inflation in the first five months of this year. There is no evidence that recent changes in US inflation rates have significantly impacted on the Irish economy to date.
While our short-term economic outlook is currently brighter than it has been for some time, there are still risks. The key risks are the possibility that US economic growth, burdened by twin deficits, might not be sustained into 2005 and that euro area growth will falter; that there might be further appreciation of the euro and further rises in oil prices; and that the increasing competition from abroad could give rise to job losses, particularly if pay increases were to exceed the levels just negotiated.
Any or all of these developments would be likely to impact on domestic output and jobs.
Would the Minister agree that the American Administration has perhaps learned from the Minister's example in the run-up to an election of running a massive budget deficit with very significant spending being flushed into the American economy at a time when real interest rates at 1% are almost one third of the inflation rate at 3%? Would the Minister agree that in those circumstances the real risk for this economy, which has massive inflation in the form of asset bubble inflation, that is, house price inflation, is that when that nirvana for President George Bush finishes, he or whoever is in the White House after November will have to make a serious correction in the US economy in terms of Government spending? The increase in inflation, partly due to oil price rises, will lead to increasing interest rates in America. We are again starting to see long-term Treasury bond rates rising as a future indicator of what is going to happen.
In those circumstances where there is a contracting fiscal policy and rising interest rates, the global economy could go into a severe contraction, leaving exposed Irish householders in particular who have been involved in an inflationary house bubble, purchasing houses often on interest only mortgages. Even a small interest rate rise in some circumstances would leave such buyers highly exposed and also leave the economy exposed to a downturn in the US and European markets. Does the Minister not see that high interest rate, high inflation scenario as being of real concern to the Irish economy?
I have alluded to the difficulties in the Unites States. Speculating as to what might occur there in the latter half of this year after the election can be somewhat tendentious. Some commentators would have us believe that nothing substantial will happen. Others take a view similar to the Deputy's. As I said in my reply, some people are of the view that US economic growth, which is burdened by the twin deficits of severe fiscal imbalance and a severe trade imbalance, will not be sustained into 2005. Any changes that occur in the US economy would have a negative impact on growth worldwide and since Ireland is most dependent on global economic conditions that would have a negative impact here.
The Deputy referred to house prices. Inflation in Ireland for the past number of months has been lower than anticipated but will rise in the second half of the year owing to oil prices in particular. At budget time we projected a rate of about 2.5% on average for the year. At the mid-term economic review and outlook we will give another guesstimate.
Regarding house prices, Ministers for Finance would prefer if there were a gradual increase in house prices each year rather than the double-digit growth we have seen for a number of years. However, double-digit growth is the result of the booming Irish economy and a number of other factors. The enormous growth in the house-buying population, very strong buoyant economic conditions, very low interest rates and an excess of demand over supply have pushed up prices. I note that recently the Central Bank conducted some investigations in this regard and has outlined to the financial institutions the care they should take in giving people loans. It has also concluded in its report that it does not see a great danger of a bubble effect.
I stress that people buying houses and getting into considerable indebtedness should always give consideration to how they will handle repayments if interest rates rise. Financial institutions are supposed to assist in that regard and they do. However, individuals should take that analysis very much to heart before committing themselves to very large indebtedness for 20, 25 or 30 years.
Will the Minister outline what he believes the Irish inflation rate will be at the end of this year? Could he also outline what powers he has? The British Government does not set interest rates but there is an independent ability to do so within the country. We are tied to interest rates which are more related to a sluggish European economy. What levers does the Government have and what measures can the Minister introduce in those circumstances both for householders who are putting themselves in a very precarious position given that interest rates could effectively double from the very low rates in a very short period of time and for the general economy, apart from sending out the occasional warning as does the Central Bank? Is there any fiscal or other regulatory instrument the Minister could avail of which would prepare us for this possible scenario?
Since we joined the euro, we do not have available to us the independence of setting interest rates. That is now done by the European Central Bank. That economic policy is no longer available. The right to set a currency exchange rate is no longer available to the Government either. We have to make do with budgetary matters and things within our own control. The most important thing to do is not to price ourselves out of the market. The situation in the UK is somewhat different, even though Gordon Brown handed control of interest rates over to the Bank of England. At least that control is still within the UK, whereas we have joined the eurozone and rates are set in Frankfurt. Borrowers should always be cautious and take into account the possibility that interest rates will rise and figure out how they can manage their own finances in such a situation. That is something that any prudent borrower should always do. There will always be those who borrow imprudently, but the vast majority of people take those things into account. If they do not do so, then they should.
What will the rate of inflation be at that time?
We are way over time and we have to proceed to the next question.
I will deal with that later in another question.
Priority questions are supposed to take 30 minutes yet they have now taken up 41 minutes. Deputies should appreciate that we are running behind time.
