The Central Bank is growing increasingly concerned about inflation, warning that the rate of price increases in the Republic is edging ahead of the rest of the euro zone. In its Summer Quarterly Bulletin, the Central Bank notes a deterioration in the outlook for inflation since its last bulletin and warns that the decline in the euro's value is likely to fuel inflation. The Bank also signals a slow down in economic growth, saying the economy will expand by about 6.5 per cent in 1999 and 2000, down from 8 per cent growth last year.
Rising oil prices combined with the euro's sharp fall threaten to push inflation here to well above the euro zone average, according to the Central Bank. Spiralling house prices are the strongest evidence of overheating and present "significant dangers" to maintaining price stability. Given the open nature of the Irish economy and the greater exposure to non-euro trade, the exchange rate decline is likely to put greater upward pressure on inflation here than in other euro areas, it states. "This is occurring when Irish inflation is already ahead of the euro area average and prices for a range of assets and domestic services are continuing to rise rapidly."
The Bank points to an acceleration in wage inflation, mainly driven by skills shortages in certain sectors, which is now running well above the rates prevailing in Ireland's major trading partners. But this is partly offset by the competitive advantage gained by Irish companies trading with the UK as a result of the sharp fall in the euro against sterling. While "superior" productivity growth will continue to offset the growth in wages, the Bank says.
Allowing for the usual time lag between the drop in the exchange rate and its impact on consumer prices, the Bank believes much of this increase will begin to kick in at the end of this year and early 2000. The Bank has revised its projections for the average rise in the Consumer Price Index by 0.25 of one percentage point to 1.75 per cent.
Meanwhile, the Bank predicts a slow down in exports due to the relatively weak international environment, particularly in continental Europe. "This is likely to persist through much of 1999, with stronger growth in the euro area unlikely to manifest itself until later this year." The high-technology sectors are experiencing much of this slowdown having enjoyed strong expansion last year. "Other exporting sectors may also experience a deceleration, although it may be more modest as their rates of growth tend to be less variable."
