More rate hikes on the horizon, central bank deputy governor warns

Consumers should brace for more rate hikes, especially if energy bills or wage demands drive prices higher, Central Bank Deputy Governor Sharon Donnery said.

As of this writing, it is clear that our current cycle of rate hikes still has work to do,” she said in a keynote address to the Nevin Economic Research Institute on Thursday.

“Despite rising interest rates and a weaker outlook, labor markets remain tight and inflation expectations have risen in line with headline inflation.

“Of course, if inflation is expected to continue, workers will demand higher wages, and employers, in turn, can raise their own prices.”

She also warned that “supply cuts in gas could continue to drive up wholesale prices, including into winter 2023.”

While the central bank believes inflation will ease next year, an energy supply shock or rising wage demands could keep inflation high for longer, Ms Donnery said.

That would force the European Central Bank (ECB) to raise interest rates further.

Polls show a “greater risk” to medium-term inflation expectations, she said, which could “endanger the ECB’s ability” to bring inflation down to its 2 percent target.

“Wage pressure is not the main reason for the current hyperinflation,” she said. “But what we clearly want to avoid is a situation where, once the current supply shocks abate, domestic wage pressures are a factor that will help keep inflation above our target over the medium term.”

Despite a spate of announced tech vacancies, Ms Donnery said the job outlook was “far from bleak” with vacancies still open in certain sectors.

She said the strong outlook could be because companies are “anticipating a relatively brief slowdown in growth.”

So far, there is “very little evidence” of a 1970s-style wage-price spiral, in which workers’ wage demands continued to drive prices up, she said.

The central bank estimates that wages in Ireland will rise by around 5-6 per cent in 2023 and 2024, slightly above the eurozone average of 4-5 per cent.

Irish inflation is expected to average around 7 per cent for 2022 and 2023, with the central bank expecting negative real wage growth, at least in the short term.

Weaker growth in the euro zone would help dampen prices and wages, Ms Donnery said.

“With a weaker economic outlook, companies will be more cautious about raising prices for fear of losing customers. Likewise, workers’ demands for higher wages must be carefully balanced against the risk of rising unemployment.”

Rising interest rates could also push up borrowing costs for states and businesses, she said.

“Recent events in the UK underscore the importance of working towards sustainable and credible tax policies over the medium term,” she concluded, adding that cost-of-living support should be targeted at low-income, elderly citizens and renters. More rate hikes on the horizon, central bank deputy governor warns

Fry Electronics Team

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