Central Bank confident of a soft landing

Regulator’s latest economic commentary paints a positive picture of domestic economy despite international headwinds

The Central Bank’s latest quarterly commentary tells us little we don’t already know. Growth is slowing but the domestic economy and the Irish labour market remain resilient. Headline inflation is falling more rapidly than expected but the full impact of monetary policy – the European Central Bank’s (ECB) 10 interest rate hikes – has yet to fully play out. Taken together, the bank’s observations and forecasts indicate that the Irish economy has shifted onto a lower-growth flight path but one that is more in keeping with its medium-term potential. “Global trade, which was weak in 2023 due to further normalisation of global consumption patterns post-pandemic, is projected to gradually recover through the projection horizon, although worsening geopolitical tensions represent a significant downward risk,” it said.

The regulator’s soft landing narrative is in keeping with those outlined by the Economic and Social Research Institute, the Irish Fiscal Advisory Council, the International Monetary Fund and the Government itself. History tells us, however, soft landings are rarely achieved, something tends to get in the way when you’ve had a sudden spike in inflation and then a corresponding jump in interest rates. In order to land the economy safely, you have to avoid a lot of turbulence. Fail to douse the fire of inflation and it could become embedded. Alternatively keep interest rates too high for too long and you clobber consumer spending and investment more than is necessary, triggering a deeper downturn.

Those pressing the ECB to bring down interest rates more quickly in the first quarter rather the second quarter of next year think Frankfurt has done too much. For its part, the ECB insists it has lifted rates by the required amount. It will probably want to see a fall-off in wage growth, the chief driver of inflation in the services sector, before unwinding its monetary screw-tightening. It’s simply too much of a crystal-ball gaze to say who is right at this stage.