Alan Farrell
Ceist:41. Deputy Alan Farrell asked the Minister for Finance his views on Eurozone interest rates and the impact on the Irish economy; and if he will make a statement on the matter. [30550/22]
Amharc ar fhreagraThursday, 16 June 2022
Ceisteanna (41)
Freagraí scríofa
It is important to put the current monetary policy environment into context. Monetary policy supports over the course of the pandemic have been extraordinary, with the ECB maintaining record low interest rates and making extensive asset purchases. This injected additional liquidity into markets and helped to maintain favourable financing conditions during the worst of the pandemic.
These favourable conditions supported commercial bank lending to firms and households, and low interest rates also reduced the burden of debt for euro area countries. This allowed necessary government borrowing to take place, which enabled the substantial fiscal support provided to households and businesses. Essentially, monetary and fiscal policy worked hand-in-glove during the pandemic.
At the beginning of this year, the outlook for the euro area economy was positive. The fading impact of the pandemic represented a tailwind for economic activity, and the expectation was that monetary policy could be gradually normalised in line with the burgeoning economic recovery. This outlook was upended with Russia’s unlawful and immoral invasion of Ukraine, with the crisis and its associated economic, financial, and other sanctions representing a large supply-side shock to the global economy. One of the major economic consequences of the war has been the significant rise in energy and other commodity prices.
Prices across the globe have risen substantially as a result, with inflation in Ireland recorded at 8.3 per cent in April, the highest rate since the series began. Against this backdrop, the process of monetary policy normalisation in the euro area has begun, with the ECB bringing their programme of quantitative easing to an end. I also note the recent announcement by the ECB’s Governing Council that it plans to raise interest rates at its upcoming meeting in July, in accordance with its commitment to ensure inflation stabilises at its 2 per cent goal over the medium term. This will be the first rise in ECB interest rates in more than a decade, following the most recent period of very accommodative policy.
As Minister for Finance, monetary policy is not a part of my remit and it is not my place to comment or speculate on the setting of Eurozone interest rates, which as the Deputy is aware is the responsibility of the ECB. Of course, higher interest rates will have an impact on the Irish economy. Indeed estimates published by my Department suggest that a one per cent increase in policy rates would lead to lower economic growth and employment over the medium term – although it would also serve to reduce inflation. As such my Department will continue to monitor interest rate developments closely.