Rates should be held at current low, says Hurley

THE EUROPEAN Central Bank (ECB) should avoid increasing interest rates until there are “clear signs that a sustainable recovery has begun”, the governor of the Central Bank said yesterday.

John Hurley, who as head of the Central Bank sits on the governing council of the European Central Bank (ECB) until his retirement in September, said rates should remain at their current historic low of 1 per cent for the near term.

“Monetary policy must continue to provide support to the real economy for as long as is necessary,” Mr Hurley said at the launch of the Central Bank’s annual report in Dublin.

Some commentators have expressed concerns that if the ECB begins an upward cycle of interest rate hikes too soon, the signs of economic recovery in the euro zone could evaporate and prompt a “double dip” recession.

An interest rate increase to fend off the inflation threat from higher oil prices would be particularly painful for the deflationary Irish economy, where consumer prices are falling faster than in other euro zone countries, putting pressure on wages.

“We see at the present that inflation tendencies are contained. If you look at the near term, I would say that inflation expectations are well anchored,” Mr Hurley said.

The ECB’s interest rate policy is aimed at keeping euro zone inflation at a rate that is below but close to 2 per cent.

However, the Harmonised Index of Consumer Prices (HICP) sank to -0.1 per cent in June, with the rate for Ireland racing ahead at -2.2 per cent.

This makes the risk of a deflationary slump greater than the risk of a spike in prices for the time being.

Forecasting an 8.3 per cent decline in gross domestic product (GDP) this year and a 3 per cent decline in 2010, the Central Bank said Ireland’s economic recovery would be gradual.

Asked if a reduction in public sector employment risked dampening consumer spending further, Mr Hurley said the rate at which consumption was plummeting was likely to ease once confidence comes back into the economy.

Once the imbalances in the Irish economy and the international financial crisis interacted with and reinforced the other, it was inevitable that 2009 would be “extraordinarily difficult”, he said.

Mr Hurley thanked the journalists present for reporting on his “dismal” messages over the years, adding: “I know we have maybe been criticised because we weren’t dismal enough but we certainly thought we were being difficult during that period.”