Prepare for rise in interest rates and price inflation, Varadkar warns

Tánaiste and Minister for Business Leo Varadkar has said the Republic must be prepared for a rise in interest rates that could make the State’s vast borrowing for the pandemic more expensive.

He said the State is “overdue” a period of price inflation, which could be followed by higher interest rates. In an interview with The Irish Times, Mr Varadkar said he “fears” the impact of inflation on the Irish economy, especially if it pushes up the cost of borrowing.

“It’s been so long since we’ve experienced it that we are overdue. We need to prepare for this possibility and interest rates going up as a consequence. I don’t think enough economists are talking about this. With so much quantitative easing, Government borrowing and low interest rates for so long, it has to be on our risk register,” he said.

Inflation worries

Minister for Finance Paschal Donohoe recently issued a similar warning.

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Several economists do not share their concerns, however. Dermot O’Leary, Goodbody stockbrokers’ chief economist, said current inflation worries in global markets related to the US and the ramifications of its $1.9 trillion stimulus plan. “Even the European Central Bank believes that euro area inflation will stay within the 2 per cent target in the longer term,” he said.

Austin Hughes, KBC Ireland’s chief economist, said a modest dose of inflation might actually help Ireland with the sustainability of its debt. “A little bit of inflation would be a good thing,” he said.

Talent and mobility

Meanwhile, addressing the Employment Bar Association conference on the world of work post-Covid, Mr Varadkar said there was a danger that cities could be “hollowed out” by wide-scale working from home or “blended” arrangements after the pandemic.

Such a development could lead to the Republic losing out to other countries for talented mobile workers, he suggested.

“We don’t want to see our cities hollowed out. Dublin, Cork, Limerick, Waterford and Galway will be competing with Barcelona, Liverpool, Paris and Lisbon in the battle for talent. And talent can remote work from almost anywhere, so our cities need to be vibrant places where talent wants to live,” he said.