Interest rates may not fall by as much as expected as a result of European monetary union, the governor of the Central Bank, Mr Maurice O'Connell, warned yesterday.
Speaking to the Oireachtas joint committee on European Affairs, Mr O'Connell warned that it was not possible to assume there would be lower interest rates for ever more. "I am not sure we are going to have much lower rates," he said, citing German rates, which are at a historic low at present but may rise before Irish rates are required to converge with them by the end of the year.
The governor repeated his preference to delay any reductions in Irish interest rates for as long as possible although he accepted that European rates might not rise in the meantime.
Mr O'Connell said the warning signs on inflation were getting stronger. "We must be very alert to the possibilities of overheating in the economy," he said.
"I was worried when credit growth was running at 12 per cent and now it is almost double that. We have seen it again and again in the building industry where there is a shortage of people for jobs. It cannot go on forever."
Responding to questions about the danger of job losses if sterling were to fall heavily, Mr O'Connell insisted that, for large scale redundancies to occur, sterling would need to fall through the floor. "And I do not see that happening," he said.
"The new Bank of England should lead to a steadier sterling and it cannot wander too far from the euro. It has been unusually strong and there are indications it may have peaked. At this point, weakening is beneficial to both the Irish and British economies. The Bank of England is also working to an inflation target and this reduces the likelihood of large-scale fluctuations of sterling versus the euro."
The governor also warned about the new rigours which membership of the single currency will entail. "If we go wrong there is no bail out mechanism and we bear the consequences ourselves. And the ECB [European Central Bank] cannot attempt to address every regional or local problem."
However, he insisted that he was confident that the project would "go right" and that there were checks and balances and no shortage of early warnings.
Theoretically, if one country goes out of line we will suffer, he admitted. "If one country were to behave badly it would put us into a state of crisis. No one knows how that would pan out and that is the reason for all the rules and regulations which are designed to stop it happening. But if you do not take a risk you would never do anything in life."
Under sustained questioning from Senator Brendan Ryan, Mr O'Connell conceded that he could not legally be required to take instructions from any source in his capacity as a non-executive director of the ECB. "But I will have Irish national interests in mind," he added.
At the same time, however, he said part of his job would be to ensure that, from day one, the euro was credible and the markets were comfortable with the newcomer. "This is absolutely vital and we should also bear in mind that the euro will have no track record.
"Confidence in a currency is established with difficulty; it could be destroyed all too easily."
