Central Bank of Ireland: ECB Policy Normalisation Needed to Prevent Expectations from Disanchoring

5 October 2022

By David Barwick – FRANKFURT (Econostream) – The normalisation of European monetary policy is essential to prevent inflation expectations from disanchoring and elevated core inflation from persisting, according to the Central Bank of Ireland on Wednesday.

In its fourth quarterly bulletin of 2022, the central bank said that key European Central Bank interest rates were ‘reverting to levels aimed at damping the inflationary pressures currently evident in the euro area and to achieve the target of 2% inflation over the medium term.’

‘This monetary policy response is important to guard against the risk of a de-anchoring of inflation expectations, and to contain the extent to which excessively high core inflation persists’, it added.

The Irish central bank noted the increasingly broadly-based nature of inflation, though energy remained the primary driver of developments. Headline inflation would ease only with energy price pressures, it said, observing that financial markets see this happening from the current quarter.

‘However risks to the inflation outlook are to the upside’, the bulletin said. ‘Consequently, a period of below trend economic growth, extending into 2024 remains a possibility.’

High inflation had led to ‘more challenging’ Irish growth prospects than foreseen, as household spending and business investment come under pressure, the Irish central bank said. A strong first half of the year would give way to a sharp slowdown, it said.

‘Inflationary pressures are forecast to ease through 2023, allowing domestic growth to pick up again in the second half of next year’, the central bank said. ‘Inflation is expected to moderate to below 3% over 2024, albeit that fossil fuel prices may stay elevated over the medium term. However, the economic outlook remains highly uncertain, with the baseline forecast predicated on current market expectations for energy prices, which have been volatile.’

The central bank projected modified domestic demand (MDD) growth of 6.4% in 2022 (up from the previous forecast of 4.3%), 2.3% in 2023 (4.2%) and 3.3% in 2024 (3.8%), subject to downside risks including a prolongation of Russia’s war of aggression.

The central bank further raised its projections of Irish HICP, calling now for 8.0% in 2022 (versus 7.8% previously), 6.3% in 2023 (4.2%) and 2.8% in 2024 (2.1%).