Irish householders and firms are most at risk of a looming interest rate hike by the European Central Bank compared to any other country in the EU, a leading Government think tank has warned.
The Economic and Social Research Institute (ESRI) warned that a so-called normalisation of monetary policy in the Eurozone – by unwinding policies designed to deal with the economic crisis – could have a greater impact on Ireland’s economy than any other member.
The think tank said more households and firms will default if the ECB hikes interest rates – which is expected to happen in 2019.
At the launch of its latest economic commentary, the institute said house prices could continue to rise for up to seven years, while unemployment will dip below 5.5pc by the end of next year, leading to increasing pressure for wage hikes.
The rate of growth in wages was four times faster in the period June 2016 to June this year, than the previous 12 months. It also warned it was unlikely that there were enough unemployed people to meet the future demands of the labour market.
Impact
But it also focused on the impact on Ireland of the ECB’s unwinding of policies designed to deal with the economic crisis and its aftermath, and the potential impact on Ireland of an ECB rate increase.
Hoping to boost anaemic inflation, the ECB under president Mario Draghi has bought more than €2trn of bonds in the past two years in a programme known as quantitative easing (QE).
It is due to end next September, and could push up borrowing costs for the State once it does.
The Frankfurt-based ECB launched its monetary stimulus programme in 2015, which has seen borrowing costs fall as a result.
But the ESRI has warned that unwinding that programme and any potential interest rate increase by the ECB, could hit Ireland negatively.
In its latest assessment of the Irish economy, it said that such moves would cut the amount of cash in the economy and also increase the cost of finance.
“If any increase in the policy rate were to be passed through to households or firms, this would ultimately act to reduce their consumption of goods and services as well as moderating the investment activity of firms,” it said.
“This would occur primarily through the cost of new loans, but it would also increase the debt service burden of Irish households’ and firms’ existing liabilities.
“As both of these groups are highly indebted from the Irish crisis, any increase in the cost of credit could lead to higher levels of loan defaults.”
The ESRI said this was a particular worry for households still in debt as a result of the financial crisis.
“Any increase in rates could seriously affect their ability to service debts and in turn lower their consumption,” it said.
It warned that any reduction in loan affordability may act as a drag on spending by households.
If banks were to pass on any rate increase to customers, Ireland would be the most affected country in Europe.
Although the ECB’s QE programme is due to end in September, the bank has signalled interest rates are likely to remain unchanged until well after this. The QE programme may also be extended beyond this date.
The ESRI said the economy was forecast to grow, in GDP terms, by 5pc this year and 4.2pc in 2018. The unemployment rate was set to average 5.4pc next year, and this could lead to an increased push for wage increases.
It also warned about the performance of the UK economy, saying the recent downward revision to growth forecasts illustrated the precarious nature of the economy.
Article Source: http://tinyurl.com/kbwqb42
