the issues In brief
ECB may raise interest rates as inflation jumps
The European Commission said on 1 March that eurozone inflation would be 2.2pc this year, increasing its previous forecasts substantially. If this scenario plays out, the European
Central Bank (ECB) is widely expected now to raise its key interest rates earlier than anticipated. The ECB forecast at the start of
December that inflation would be between 1.3 and 2.3pc this year. Now euro area annual inflation is expected to be 2.4pc in February 2011, according to a flash estimate issued by Eurostat, up 0.1pc from January. It has been driven up by climbing oil and food prices. The ECB wishes to keep inflation at
about 2pc and the European Commission is optimistic it can do so. “The remaining economic slack, sub-
dued wage growth and overall well- anchored inflation expectations should contribute to keep underlying inflation- ary pressures in check, with inflation expected to end the year at close to 2pc,” the Commission said. EU Commissioner Olli Rehn also said
on 1 March that the eurozone’s economy is likely to grow at a greater pace than expected in 2011. In its twice-yearly inter- im economic forecasts, the Commission said it expected the eurozone to grow 1.6pc this year, up from1.5pc it forecast in November.
Manufacturing sector increases output
Ireland’s manufacturing sector continued to grow in February, with new orders and employment rising at the fastest rate in some 11 years. For a fifth month in a row, the NCB
manufacturing Purchasing Managers’ Index rose by 0.1. The index, designed to measure of the health of the manufactur- ing industry was 56.7 lastmonth. Any fig- ure above 50 signals growth. The NCB survey noted that, as exports continue to drive growth, the sector has strengthened to the greatest extent since January 2000.
Key deadlines loomfor new government
As we go to press, talks are continuing between the two big winners in General Election 2011, on the formation of the next government, but one thing looks certain, Fine Gael leader Enda Kenny will be the next Taoiseach of Ireland, leading a coalition government with Labour. Fine Gael and Labour have
Rehn told reporters
Incoming Taoiseach Enda Kenny TD
in Brussels that the EU would be dis- cussing key issues with Ireland. “Pricing policy, I am referring to the interest rates, is one key issue which will be discussed in the context of the comprehensive strat-
diverging policies on certain issues, including taxation, public service reformand, critically, how to ‘rene- gotiate’ the EU/IMF bailout deal. However several key deadlines will focus the mind, and as you read this, the deal should be done. A key deadline looming is 11
March, when leaders from euro- zone members meet to discuss plans for a permanent mechanism for responding to sovereign debt crises, and the implementation of economic reforms to avoid such crises in the future. The aim is for EUleaders to secure an agreement on such reforms at its summit on 24 and 25 March. Prior to that, Enda Kenny was
due to fly to Helsinki on 4 March, for a meeting of the European People’s Party where he was to meet, among others, German Chancellor Angela Merkel. Kenny is on record as saying he will seek to ease the conditions of the bailout, and to lower the 5.8pc interest rate on aid loans, and a possible end to the protection of senior bank bondholders. European Commissioner for
Economic and Monetary Affairs, Olli Rehn hinted on 28 February that the EU would discuss the pos- sibility of lowering the interest rate payable by Ireland on so- called bailout loans.
egy of the European Union,” he said. “We have a common goal for Ireland to revive its growth dynamic and succeed in ensuring debt sustainability.” He said that the Union “looks forward” to con- tinuing to support the Irish people and new government. But the EU/IMF interest rate
may be a side show to some extent, as it is expected that any lowering of the rate will be part of the wider reform agenda to be agreed in late March. Another major challenge to face
the new government will be the recapitalisation of the Irish banks. On RTÉ’s Prime Time on 1 March, Governor of the Central Bank Patrick Honohan said the delay in the €10bn recapitalisation of the banking system in February had caused “alarm” in Europe. He said formerMinister for Finance Brian Lenihan’s decision to put off the latest capital injections that were scheduled to happen before the end of February was not welcomed by Europe. He said the govern- ment missed an important dead- line and many in the European Central Bank had to be convinced the move was reasonable. However, Honohan added that
doing it after the election would ensure greater legitimacy and “buy-in” from the people of Ireland. He advised the new gov- ernment to put the €10bn into the banks before the end of March.
10 Irish Director Spring 2011
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