Central Bank issues warning on inflation

By Andrew Bushe

DUBLIN — The Central Bank has given one of its strongest warnings yet on the economy and has strongly criticized Finance Minister Charlie McCreevy’s giveaway budget saying its overall thrust “is likely to exacerbate the dangers already evident in the area of inflation, wages and house prices.”

In its winter quarterly bulletin, the Bank said last week that the increase in incomes has increased the capacity to incur higher borrowing and this raises the risk of a renewed acceleration in the demand for

credit and a jump in home prices.

As a result of the budget and the increases following the renegotiation of the national pay deal, the bank has revised its inflation forecast for next year to 5 percent from 4.

“Inflationary pressures are now abundantly evident in consumer prices, wage demands, infrastructural problems and in the continuing vigorous increases in asset prices, especially property,” the report said.

“External factors, such as the depreciation of the euro, oil price increases and excessively low interest rates, have contributed significantly to the acceleration of inflation in the recent past, but it would be misleading to attribute the current high rate of inflation largely to these factors.

“The home-grown nature of much of our inflation is confirmed by the persistent and substantial increases in services inflation and the increases in property prices.”

It is also advising lending institutions to “exercise greater caution” in accommodating further increases in credit, given the very large increase in borrowing that has already occurred in recent times.

“It is also imperative that the social partners adhere to the strict terms of the revised PPF as without this discipline there is a real danger of a wage-price spiral developing.”

The bulletin says the economy continues to grow “strongly and vigorously.” For the year as a whole, the growth of real GNP is estimated to have been about 8.75 percent, slightly higher than the average performance of the previous six years.

But it warned that “the scope for the continuation of such growth for much longer has been reduced substantially . . . as the scale of employment increases experienced in recent years is no longer feasible.”

It forecasts that GNP growth is likely to slow next year to 7.25 percent.