Central Bank inflation data anxiously awaited

ALL eyes in the Dublin market this week will be focused firmly on the inflation figures and the Central Bank autumn statement due out on Thursday.

There is concern that a high inflation figure could persuade the Central Bank to drive wholesale interest rates up further, perhaps triggering another retail rise.

The fear that high credit growth rates, particularly in mortgages, could boost inflation persuaded the Central Bank to push up interest rates over the last month.

So far there have been few inflationary signs in the economy. In the last quarter, the headline inflation rate fell sharply to 1.4 per cent year on year, mostly due to a holiday price war and the rise in the value of the pound against sterling.

This week, analysts are predicting a headline rate between 1.6 and 1.8 per cent. The underlying rate excluding housing is also expected to rise.

According to Dr Dan McLaughlin, chief economist at Riada Stockbrokers, it will rise to 2.1 per cent from 1.7 per cent. "That is still low inflation", he said.

"Most people would assume that around 2 per cent effectively means stable prices and it is still easily within Maastricht guidelines for joining the single currency."

He added: "this time last year inflation was helped by lower food prices. The long hot summer had driven down the price of potatoes and vegetables. This year, food prices have risen if anything. On top of that the holiday price war is unwinding.

Mr Jim O'Leary, chief economist at Davy Stockbrokers, also expects inflation to rise. However, he noted that the mortgage reduction earlier this year would act as an anti inflationary factor.

"The mortgage cuts were not fully captured in the May figures and some will spill over to this week's numbers", he said.

He added that the only risk was that his forecasts might turn out to be too high.

"Any surprises are much more likely to be pleasant. If we do have to materially revise our forecasts it is much more likely to be down than up."

The Central Bank autumn bullet in will also be read with more than average interest, Mr O'Leary said.

Last week, the Central Bank revealed it was a net seller of the pound in July. This was against all predictions. Most brokers had believed the Central Bank had been a net buyer during its July foreign exchange market interventions.

"Prior to that we believed the Central Bank was primarily concerned about exchange rates. This now indicates that the motivation was largely if not wholly domestic credit related."

Other analysts added that it now looks as if the bank may have an unofficial ceiling of 104p against sterling for the pound. "It will be interesting to see if any light is shed on this next week, one analyst said.

However, even if inflation is growing more rapidly than the Central Bank would like, many analysts question whether it has the ability to push rates higher, in the face of political opposition.