The Irish central bank has revised down its projections for economic growth and inflation for this year and next, citing the impact of the pandemic, Brexit, and global supply chain disruptions. The bank warned that the outlook remains uncertain and subject to downside risks.
The central bank said in its latest quarterly bulletin that it expects the Irish economy to grow by 8.7% this year, down from its previous forecast of 9.4% in July. It also lowered its growth forecast for 2024 from 4.6% to 4.2%. The bank attributed the downward revisions to the slower-than-expected recovery of domestic demand and the adverse effects of Brexit on trade and investment.
The bank noted that the Irish economy has shown resilience in the face of the pandemic, thanks to the strong performance of the export-oriented sectors, especially the pharmaceutical and technology industries. However, it said that the domestic sectors, such as hospitality, tourism, and entertainment, have suffered from the prolonged lockdowns and social distancing measures. The bank added that the vaccination programme has helped to ease the health crisis and support the reopening of the economy, but the emergence of new variants poses a threat to the recovery.
The bank also highlighted the challenges posed by Brexit, which has reduced the trade flows and investment links between Ireland and the UK. The bank said that the trade and cooperation agreement between the EU and the UK has mitigated some of the negative effects of Brexit, but it has not eliminated the frictions and costs associated with the new trading arrangements. The bank estimated that Brexit will reduce the level of Irish GDP by 2.5% in the long run.
Inflation Outlook Lowered Amid Global Supply Chain Disruptions
The central bank said that it expects inflation to average 2.1% this year, down from its previous forecast of 2.4% in July. It also lowered its inflation forecast for 2024 from 1.5% to 1.3%. The bank attributed the downward revisions to the lower-than-expected inflation in the third quarter and the assumption of a gradual easing of the global supply chain disruptions.
The bank said that inflation has risen sharply in recent months, reaching 3.1% in September, the highest rate since 2012. It said that the main drivers of inflation have been the higher energy and food prices, reflecting the global surge in commodity prices and the supply chain bottlenecks. The bank added that the base effects from the low inflation in 2020 and the temporary reduction of the VAT rate for the hospitality sector have also contributed to the inflation spike.
The bank said that it expects inflation to moderate in the coming months, as the base effects fade and the supply chain pressures ease. It said that the underlying inflation, which excludes energy and food prices, remains subdued, reflecting the spare capacity in the economy and the moderate wage growth. The bank said that it does not see any signs of second-round effects or inflation expectations becoming unanchored.
Central Bank Maintains Accommodative Monetary Policy Stance
The central bank said that it will continue to support the economy with its accommodative monetary policy stance, in line with the European Central Bank (ECB). The bank said that it will keep its key interest rate at zero and provide ample liquidity to the banking system through its refinancing operations. The bank also said that it will maintain its asset purchase programme, which aims to lower the borrowing costs and stimulate the credit flow in the economy.
The bank said that its monetary policy stance is appropriate, given the uncertain and uneven nature of the recovery and the subdued inflation outlook. The bank said that it will closely monitor the economic and inflation developments and adjust its policy accordingly, if needed. The bank added that its policy stance is contingent on the fiscal policy stance of the government, which has also played a vital role in cushioning the impact of the pandemic and Brexit on the economy.
The bank said that the government has provided unprecedented fiscal support to the economy, amounting to about 25% of GDP in 2020 and 2021. The bank said that the fiscal stimulus has helped to preserve jobs, incomes, and businesses, and to mitigate the scarring effects of the crisis. The bank welcomed the government’s budget for 2024, which aims to balance the need for continued support and the need for fiscal sustainability. The bank said that the government should maintain a prudent and flexible fiscal policy, taking into account the economic and health conditions and the potential risks.
