Central Bank of Ireland Revises Inflation Forecast Downwards, But Warns of Sticky Core
8 March 2023
By Xavier D’Arcy – FRANKFURT (Econostream) – The Central Bank of Ireland on Wednesday said that domestic inflation was set to be lower than previously expected in 2023 but that underlying inflation pressures looked set to persist.
In its latest quarterly bulletin, the CBI said that Irish inflation – according to the Harmonised Index of Consumer Prices used by the ECB – was now only expected to average 5% over the course of 2023, down from the previous prediction of 6.3% issued in October 2022.
The inflation forecast for 2024 was revised upwards to 3.2%, up from 2.8% previously. This was expected to ease to 2.2% in 2025.
Core inflation, however, looked set to remain elevated for a prolonged period of time, with projections seeing HICP excluding food and energy at 2.8% in 2024 and 2.9% in 2025.
Central Bank of Ireland Director of Economics and Statistics Robert Kelly told journalists that ‘overall, it's likely that headline inflation has now peaked, and in the absence of further energy price shocks, we expect it to moderate this year and next.’
‘Core inflation - that excludes some of the more direct impacts of energy prices - is likely to be more persistent, but is projected to also decline, albeit at a more gradual pace over the forecast horizon’, he said.
‘The largest contribution to this downward revision [of the inflation numbers] comes from the energy price outlook’, he said. A further major factor was services inflation, which ‘has fallen sharply through autumn 2022’, he said, adding that ‘this is in contrast to the dynamics of the euro area’, where services inflation has grown in recent months.
Falling core inflation was ‘mainly being driven by one-off factors over the second half of last year, and we expect it to be more persistent than headline inflation, falling more gradually over the forecast horizon’, he said.
The central bank’s growth projections for the Irish economy in 2023, measured using modified domestic demand, the government’s preferred measure of domestic activity that excludes the distorting effects of imported intellectual property, was revised upwards to 3.1%, from 2.3% previously.
‘Uncertainty remains high, but the risks to the domestic growth outlook are now less tilted towards the downside than in the previous bulletin’, Kelly said. The forecasts were contingent, he said, on geopolitical tensions not escalating and energy prices continuing their downward trajectory.
The bulletin highlighted the strong pass-through of ECB rate hikes in Ireland due to the large stock (61%) of variable rate and tracker mortgages in the country. It was expected that hikes ‘would impact the consumption of that group [of borrowers], obviously, as they have less disposable income due to the rate hikes’, Kelly said.