Threat of first interest rate increase may recede for three years

The first hike in interest rates may be longer away than thought as the ECB holds off for almost a further three years despite the eurozone expanding at a fast clip, a leading economist has predicted.

Threat of first interest rate increase may recede for three years

Philip O’Sullivan, chief economist at Investec Ireland, also raised his outlook for the Irish economy over the next two years, saying that population growth will give an additional spurt to growth here.

The threat of a hike in interest rates that could undermine consumer spending by increasing servicing costs on mortgages, which many markets predict will happen by late 2019, could even recede into 2020 based on recent comments by ECB president Mario Draghi, Mr O’Sullivan said.

Investec projects the Irish economy will grow by 4.8% this year and expand in 2018 by 4.4%, a significantly faster pace than it previously forecast.

Growth across the eurozone will reach 1.7% this year and 1.8% in 2018, the European Commission has forecast. The ECB sees a faster pace of growth of 2.2% this year.

Unemployment, which is currently at 6.3%, will fall to 4.5% by 2019 as the economy continues to expand without the fuel of huge injections of credit. Unemployment at 4.5% would be among the lowest ever recorded in the State when the bubble-era is excluded. However, it will be “sometime in the next decade” before supply of housing catches up with demand and house prices will rise 10% this year and 8% in 2018, the lender predicts.

“What might derail Ireland’s positive growth story?

“Brexit remains a key threat for Ireland, with the UK accounting for a sixth of headline exports. On the whole, sterling and dollar moves have been a headwind for many firms this year,” said Mr O’Sullivan.

CSO figures showing the population grew this year by almost 53,000, the largest increase since before the crash, will keep the pressure on housing, according to analysts.

Dermot O’Leary, chief economist at Goodbody, said with the supply of housing falling far short of demand “it is little surprise that rents and prices continue to grow rapidly”.

New CSO figures also showed that retail sales grew in volume terms by 6.7% in August from a year earlier, when car sales are excluded.

Price discounting by some importers probably accounted for the 3.8% increase in annual retail sales when measured in value terms. Car sales have been affected by the slump in the value of sterling. Pharmaceutical and cosmetics, fuel, and electrical goods showed strong sales increases in August from the previous month.

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