The launch of the single currency may be seven weeks away but for all practical purposes this State and its economy have already entered the euro-zone. This is graphically illustrated by last night's further cut of 1.25 percentage points in interest rates. Cumulatively, the Central Bank's base interest rate has now fallen by a remarkable 2.5 points in the past month.
With the economy in danger of overheating, the concern must be that these cuts will stimulate over-rapid growth and trigger further inflationary pressures. Indeed, the bank's governor, Mr Maurice O'Connell, has said that he would prefer not to be reducing rates at this stage of the economic cycle. But since Irish interest rates must converge with the lower rates in France and Germany before monetary union, the Central Bank has no other option. The economy is now moving into uncharted territory. Hefty interest rate cuts at a time when we are enjoying record levels of growth and consumption are unprecedented. The danger signals are unmistakable. Yesterday's figures showing average industrial earnings up by seven per cent in the year to June 1998 underline the inflationary pressures evident in parts of the economy. Meanwhile, in advance of the Budget, the pressure on public service pay levels continues to build. The challenge facing the Minister for Finance, Mr McCreevy, in framing the Budget is to address some of these concerns, without allowing the inflationary threat to take hold as we enter the single currency.
Despite the inherent economic dangers, the interest rate cuts will, of course, be welcomed by most borrowers. While the full reductions will not be passed on to mortgage holders by the financial institutions a householder on a typical £50,000 loan will save an average £45 as a result of the mortgage changes in the past month.
This is by no means the end of the current cycle; interest rates must still decline by a further 0.4 percentage points before they fully converge with French and German rates. And a further reduction in the core European rates cannot be ruled out later this year or early in 1999. There must be concern that interest rate cuts on this scale could have very serious implications for the property market. All the evidence suggests that the actual benefits of rate reductions are often eroded as a further bout of house price inflation is unleashed. The Minister for the Environment, Mr Dempsey, is now threatening builders with "stringent action" if they don't keep prices in check. But in the absence of suitable control instruments he may as well whistle in the wind; demand greatly outstrips supply and developers know that a fat profit is there for the taking.
A more robust and interventionist approach is required by Government in the Budget - or even before it - if home buyers are to be afforded some protection in a dangerously overheated sector. To be fair, the Bacon report has at least temporarily helped to calm the speculative feeding frenzy in the housing market, but clearly it has not done enough for the first-time buyer. At best, its restraining influences will be effective for perhaps a year or so.