Madam, - A recent article by your economics editor, Paul Tansey, commenting on the recent interest rate rise by the European Central Bank, is headlined: "Inflation to increase greatly as result of rate rise" (Business This Week, July 4th).
This is wrong. As Mr Tansey himself goes on to acknowledge, the reason for the rate rise was to combat rather than to stimulate inflation. That, of course, includes Ireland, mortgages or not. As every economics student knows, a rise in interest rates means less money available for spending, due both to the increased cost of borrowing and to the increased attraction of saving,
Indeed, Mr Tansey acknowledges that domestic demand will weaken further", which of course means prices do not rise to the extent they otherwise would. The effect on businesses is, of course, important also as regards household spending, because business expansion is put on hold, acting against employment and wage increases, giving less money overall in people's pockets and so again reducing consumer demand.
But don't the level of Irish mortgages make Ireland different? Not so. Mortgages are of course a feature of other European countries too, and were factored into the ECB decision. Again, Mr Tansey says: "Increased mortgage repayments will leave households with less discretionary income to spend."
As Mr Tansey writes, the Central Statistics Office has said the mortgage rate rise will in turn mean a rise in the Irish inflation rate of 0.6 p er cent. However, that is just looking at one factor and its immediate effect. There are many factors apart from mortgages in the Consumer Price Index, the standard measure of Irish inflation.
As mentioned above, the pressure on those factors is downwards, not upwards, more than compensating for the rise in borrowing costs included in the index.
Secondly, even regarding borrowing costs, the underlying asset values rise more slowly than they otherwise would. So house prices rise more slowly, or indeed fall, as mortgage rates rise. - Yours, etc,
PAUL BRACCIANO and PETER DOUGLAS,
Dublin 2.