Inflation in Ireland will fall back by the end of the year but long-standing trends that have meant price pressures are stronger here than elsewhere in the eurozone will likely persist, Central Bank governor Gabriel Makhlouf has said.
The structure and relatively small size of the Irish economy, as well as energy imports, mean that Irish inflation rates have for some time trended slightly above eurozone levels and that will likely persist even as the current inflation pressures eases, the governor said.
Speaking to reporters, Mr Makhlouf said that an early signal that inflation was starting to become embedded in the economy would be if there were wage rises being awarded that were not linked to productivity gains. However, there was no sign of that at the moment, he said.
Irish inflation in December was running at 5.5%, the fastest pace for two decades, CSO figures last week showed, and most economists believe that driven by energy costs that price rises have further to go. Britain's annual inflation is running at 5.4%, Canada's at 4.8%, which are both at new 30-year records, and German inflation rose by 5.3% in December, the highest since the summer of 1992.
The governor said that some firms that were already struggling and others that face changed trading conditions would likely struggle now that the Covid economic restrictions have been lifted.
Lenders, he expected, would take “a case by case” approach to assessing the viability of businesses but it was up to the Government to weigh whether a case for any sort of general debt forgiveness could be made.
Mr Makhlouf reiterated that the ECB will likely lag the Bank of England and US Federal Reserve in raising “headline” interest rates and the evidence at the moment was that the ECB was unlikely to raise rates this year.
Speaking to the Institute of Directors earlier, the governor said that global price increases which have been driven by surging energy costs “have been spectacular”.
“We expect energy prices to moderate, but it may take time for people to experience it in view of the lag between wholesale and consumer prices,” Mr Makhlouf said, acknowledging that global political events and weather may determine whether prices fall back or not.
Nonetheless, the outlook for the Irish economy was positive as the Covid economic crisis lifted, even though some of the financial pressures facing firms will only be known in time.
Consumption had increased strongly and employment levels had increased, he said.
“People often talk of a twin economy in Ireland when discussing the multinational sector and domestic economy. Indeed, looking at trade, two sectors are now responsible for more than 50% of Irish exports in value terms, namely the pharmaceutical and ICT sectors,” Mr Kakhlouf said.
“But exports by Irish firms also recovered in line with global demand. In fact, the success of Irish enterprises in general alongside the recovery in the global economy continues to have a positive impact on the whole of the Irish economy, not least the public finances,” he said.