ECB interest rate policy protecting Ireland from shocks, study finds

Central Bank paper warns no room to manoeuvre for next threat as rates already zero

 President of the European Central Bank Christine Lagarde: economists forecast quantitative-easing programme will run until start of 2022. Photograph: Alessandro Della Valle

President of the European Central Bank Christine Lagarde: economists forecast quantitative-easing programme will run until start of 2022. Photograph: Alessandro Della Valle

 

Economic uncertainty in Ireland is increasingly driven by international events such as Brexit and the election of US president Donald Trump rather than domestic issues, a new study has suggested.

It also found that the impact of these global policy shocks on the economy here had been limited by “sharp” reductions in the European interest rates, designed to spur growth.

The paper, released by the Central Bank of Ireland, however, warned that with little or no room for manoeuvre on interest rates, currently at zero per cent , the next series of shocks could have a more persistent and damaging impact on Irish economic activity.

The research examined the implications of “heightened uncertainty” for Ireland, a small open economy operating within monetary union, by looking at a string of recent policy shocks, both domestic and international.

They included the sovereign debt crisis in Europe, the water charge protests here and the ongoing Brexit uncertainty.

Domestic shocks

It found that domestic shocks triggered declines in investment and employment as they were not accompanied by rate policy responses.

“On the other hand, no such decline in demand is observed following global uncertainty shocks, largely resulting from an accommodative monetary policy stance by the European Central Bank, ” it said.

The paper concluded that policy uncertainty shocks had negative and persistent effects on Irish real economic activity, only when interest rates do not react or are constrained.

With the euro-area economy stabilising and a stimulus package already in place, few experts are predicting a major change in policy by the ECB in the short term. Economists predict Frankfurt’s quantitative-easing programme, which was resumed by former ECB president Mario Draghi just before he handed over to Christine Lagarde in November, will run until the end of next year, with interest rates on hold until early 2022.