NTMA gives market a breather as Rehn of Terror insists rates must rise

Now, as Finland’s central bank governor, Rehn sits on the Governing Council of the European Central Bank, where he is something of a trailblazer.

In the ranks of interest rate hawks and doves, he sits somewhere in the middle, along with our own central bank governor, Gabriel Makhlouf.

But that middle is shifting as inflation across the common currency area shows little sign of abating.

Now Rehn has joined the chorus of Germanic voices in Frankfurt calling for tighter monetary policy and interest rate hikes from July.

In an interview over the weekend, the Finn said he sees “stagflationary tendencies” in the euro-zone economy as so-called side effects of higher prices – such as wage demands – trickle through.

Hence his call to the ECB to raise the interest rates on deposits, which have been negative for years, to zero by the autumn.

That would be the prelude to a refinancing rate hike in the final quarter of the year, which would have a significant impact on borrowers, especially borrowers with tracker mortgages.

This is a tricky dance to choreograph.

As recently as January, ECB chief economist Philip Lane signaled that inflation was likely to be temporary and rate hikes could probably wait until 2023.

But Lane and the other doves were grounded by the reality of ever-rising consumer prices. All the signals for Council members point to only one outcome: rate hikes sooner rather than later.

Markets have already started to anticipate the inevitable tightening of ECB monetary policy as first the Bank of England and then the Federal Reserve took action.

For example, the yield on Ireland’s 10-year bonds is now 1.85 percent. Ireland borrowed for free less than a year and a half ago.

Perhaps the National Treasury Management Agency (NTMA) learned the painful lessons of the two-step austerity program all those years ago and hoarded a vast stash of cash in recent years when credit was cheap.

Now the agency is content to sit out any potential market turbulence surrounding the ECB’s decision by canceling its planned debt auction in June.

With €27.5 billion in cash on the books, it can afford that. Ireland’s booming economy is helping too.

But the NTMA also tells us something with its own choreography.

Eurozone monetary policy, arguably the savior of the Irish economy if the government has to borrow heavily to fund Covid support measures, is now back in tune properly with local economic conditions. After all, when an economy is hot, interest rates should rise.

With Ireland’s deficit shrinking and taxes booming, there’s probably never been a better time to make the switch.