INFLATION remained subdued over the summer lowering the prospect of another interest rate rise. Continuing low inflation of just 1.5 per cent, was thanks mainly to a much lower than expected rise in food and energy prices, although the Central Bank is concerned that inflation could pick up next year.
Overall, the Consumer Price Index (CPI) rose by just 1.5 per cent for the year to mid August, compared to 1.4 per cent in mid May, according to the latest official figures. The figure came as a relief to the Central Bank, which last month allowed one month rates to rise on the money market, forcing a rise in retail interest rates.
The annual figures and the quarterly figure of 0.5 per cent are at the bottom end of analysts' expectations. Some economists had been pencilling in a rise as high as 2 per cent.
On a EU harmonised basis which standardises the calculation of inflation across the EU inflation rose to 2.2 per cent, from 2 per cent in June. This is still within the Maastricht guidelines of a maximum of 2.7 per cent and around mid way in the table of all the other EU member states.
The CPI excluding mortgages also came in lower than expected at 1.8 per cent, from 1.7 per cent three months ago.
The Central Bank welcomed the "muted inflation numbers" but warned that there was likely to be some upward pressure on prices in the medium term.
The Bank's assistant director general, Dr Michael Casey, said it had to keep a close eye on the EU harmonised measure. "That is the measure we will be judged on for Maastricht qualification," be said.
The Bank is officially predicting average inflation this year of 1.75 per cent, rising to 2.2 per cent next year. However, on the harmonised measure, the Bank is only expecting a rise to 2.25 per cent next year.
Dr Casey said the main threat to inflation would come from excess demand in the economy, although he could not rule out risks from international prices. Oil prices could rise, he said.
Overall, the Bank seems to be most concerned about credit growth, although it expects to seed the credit figures "moderating" over the rest of the year. The "comfort zone" would be credit expansion at around 10 per cent, Dr Casey said. The Bank has no official forecast for credit expansion.
According to Mr Jim O'Leary, chief economist at Davy stockbrokers, the Bank is "entirely wrong" with its emphasis on credit growth.
In any case, he added, the Bank would have serious political problems if it attempted to push interest rates up further.
Ms Aisling Reilly, economist at Goodbody Stockbrokers, said she now believed that inflation had bottomed out.
However, other analysts still the expect the Central Bank to continue engineering another rise in interest rates. "They were hoping that the banks would put up rates by a half point and they only got quarter point rises on average," one said. "They will continue pushing the inter bank rate up to 6 per cent in the hope that the banks will put up rates by another quarter point."
In its Autumn Bulletin, the Central Bank also predicted that growth would slow slightly over the rest of the year. It forecasts that GNP is likely to grow at 5.25 per cent in 1996, compared to a long run average of between 4.5 and 5 per cent.
It is also predicting a rise in imports and a consequent decline in the surplus in the balance of payments from 2.5 per cent in 1995 to 1.5 per cent in 1996.
At the same time, total employment will rise by 37,000 or 3 per cent, it predicts. Taking into account a likely rise in the labour force of 21,000, the unemployment rate on a Labour Force Survey basis is expected to fall to 11.75 per cent.
