THE RATE of inflation has fallen to its lowest level in almost four years, but the Central Bank has sent a clear signal that it will not allow an early reduction in interest rates.
A sharp fall in prices in the shops during the January sales left the annual inflation rate at just 0.9 per cent last month, indicating that rapid economic growth is not feeding through to higher prices.
Forecasters believe that a low inflation rate and the move to monetary union will lead to lower interest rates later this year. However, last night the Central Bank, in its annual policy statement, appeared to rule out an early reduction in borrowing costs
The bank warned that inflation is still a threat and said the recent Budget, by adding money into the economy and allowing a rapid rise in public spending, increased the risk of a rising inflation rate. It also voiced concern about rising house prices and the rapid growth in borrowing, from banks and building societies.
Its warning came despite figures from the Central Statistics Office which showed that the consumer" price index fell by 0.5 per cent between November and January. This left prices last month just, 0.9 per cent higher than a year earlier. According to Mr Donal Murphy, director general of the CSO, the figures "certainly do not indicate any upward pressure on inflation". The only significant increases were in food and alcohol which increased during the year by 1.6 per cent and 3.3 per cent respectively.
The dramatic fall in prices during the past three months appears to have been due to sharp cuts in the price of clothing and household appliances in the January sales. Much of these reductions are likely to be reversed in February. And Budget increases in price of petrol and tobacco are excluded from the CSO's calculations but will count in the February inflation figures.
Overall prices in February could rise by between 0.5 per cent and 1 per cent, but this would still leave an inflation rate of well below 2 per cent. Provided the average rate for this year remains at no more than 2.5 per cent, then Ireland will be well placed to meet the Maastricht criteria for monetary union.
But, despite the figures, the Central Bank is likely to hold off on any interest-rate cut for as long as possible. With the strength of the pound against many of our trading partners a major element of the bank's fight against inflation, it insisted that it might actually raise rates if the currency weakened significantly.
However, most market analysts believe it would be very difficult for the bank to actually raise interest rates at a time when the move to monetary union is indicating a fall and the pound remains so strong in the ERM band.
The Central Bank remains worried about the growth in borrowing from banks and building societies. It wamed that there is no guarantee that bad debt levels will continue to be low and said there might be a need for tightening of credit standards by the lending institutions. In a brief comment on the Budget, it says its "expansionary stance" increased the risk of rising inflation.
Lobby groups from the Irish Farmers' Association to exporter groups have been calling for cuts in interest rates of up to one percentage point.