Central Bank of Ireland Deputy Governor: Monetary Policy Will Normalise in Time
2 July 2021
By David Barwick – FRANKFURT (Econostream) – Monetary policy will eventually normalise, a process that could lead to a rise in sovereign bond yields if public debt is elevated, Central Bank of Ireland Deputy Governor Sharon Donnery said Friday.
Speaking at Les Rencontres Économiques d’Aix-en-Provence, Donnery said that ‘[a]s monetary policy normalises – which it will in time – higher debt may lead to increased investor scrutiny and the associated risk of a rise in sovereign bond yields.’
The nature of the crisis ‘provides little room for doubt that the significant increase in government debt was justifiable, on economic grounds alone’, she said. Monetary and fiscal accommodation ‘should reduce the extent of scarring effects of the pandemic, which nonetheless could be substantial.’
‘As health risks diminish, considerations of elevated debt levels require more nuance’, she said. In the case of Ireland, she called for targeted, temporary measures to ‘gradually replace the broad supports which were suitable as a rapid response to the onset of the pandemic.’
‘In particular, supports should facilitate post-pandemic structural adjustments in the way we live, work and travel, rather than targeting a return to pre-pandemic norms’, she added.
Ireland’s debt-to-GDP ratio will probably decrease with the recovery, but ‘it is vital that the reduction provides sufficient scope to respond to future downturns’, she said, observing that the pandemic crisis had given evidence of the potency of countercyclical fiscal policy.
Donnery suggested that additional public spending limit inflationary pressures ‘where there are significant labour and/or raw material shortages, reducing crowding-out risks’, and cautioned again that ‘[w]hile low interest rates ease repayment burdens, this may not last.’