The risks of hefty wage increases tipping the economy into a new crisis have risen significantly and will require the Government to keep monitoring the threat each and every quarter, outgoing Central Bank governor Philip Lane has warned.
Speaking to reporters at one of his final public events before taking up a new job as a senior ECB policymaker on the executive board in Frankfurt, Mr Lane said that the growth of jobs in Ireland and elsewhere was “remarkable”, which meant any outsized growth in wages was the most likely source of generating overheating in Ireland’s fast-expanding economy.
He said he favoured "sustainable" wage increases but signalled to the Government the difficulties of cutting wages should the economy go into reverse.
The governor reiterated his warning in the run-up to October’s budget that the Government should think of offsetting the large amounts of money it plans to inject into the economy in its plans to fund large infrastructure projects by way of other revenue tax raising funds.
“If there was overheating, it would cause long-term damage because it is easy to raise wages and difficult to cut wages,” he said.
“The bigger issue right now is not demanding too much from the Irish economy. If you have unemployment at 4.6% and you want to do more for public investment and you want to hire more public sector workers for health, for education and so on, that is a reasonable political choice,” Mr Lane said. However, there were potential risks, he said.
Boosting the ‘Rainy Day’ fund or reducing debt could help to prevent any risks of overheating in the event of wages increasing sharply.
“We are entering a phase where quarter-by-quarter, we really have to keep an eye on this. We are convinced this is not a small issue,” he said, adding that no one should be “in denial” that there is a limit to what the Irish economy can deliver.
Asked if October’s budget was particularly important, the governor said that there was the “tricky situation” that needed to be worked through should there be a benign outcome to Brexit, as the capacity for the economy could very quickly be reached.
However, he told reporters that it was the widely-shared view that the risk of a hard Brexit had risen in recent months. Much work had already been done between the ECB and Bank of England to safeguard the financial system in the event of a no-deal Brexit, he said.
The ECB has “had years to think about it, to prepare for it” and “there is no lack of information” in the economics world about the effects of a hard Brexit.
Asked if he regretted that there had been no new major banking entrant into the Irish market to help reduce some of the costliest loans in the eurozone that Irish lenders charge SME and home mortgage borrowers, he said any challenger bank looking to enter the Irish market faced a much more stable system.
He said that the Irish bank pricing was driven by a combination of the additional risk costs lenders faced in doing business here and “a degree of monopoly pricing”.
More regulatory and legislative certainty would help encourage potential challenger banks, the governor said.
He said staff numbers and the wages bill at the central bank had risen because it needed more regulators and to prepare for Brexit as lenders moved their operations from London to Ireland.
The Central Bank was, however, now at a full strength and was entering a period of consolidation after its rapid expansion, he said.