European Central Bank interest rates are always of vital interest to Ireland, but never more so than in the years ahead when parts of the national debt – which has spiked due to Covid-19 – come to be refinanced.
The general view of market analysts is that the latest policy review by the ECB, and its comments after its latest central council meeting on Thursday, underpin the likelihood of interest rates staying low for a significant period. Despite the ECB’s base rate being at zero and its deposit rate at minus 0.5 per cent, some believe interest rates will not increase until 2024, or even later.
Before then the extraordinary purchasing of Government debt by the ECB, which helped countries to raise massive borrowings during Covid-19, will be wound down. This is not due to start until March 2022, at the earliest. This is the initial battleground between the hawks on the ECB board , led by Germany and the Netherlands, who will push for a quicker reduction in the purchases and the majority, who argue for ongoing support.
The argument about tapering of central bank support is already live elsewhere, notably in the US, where inflation was 5.2 per cent in June, albeit influenced by a range of Covid-related factors, many of then once-off. Where the US goes, Europe does not necessarily follow – there is an argument that population and economic trends will keep interest rates low, even if they do rise a bit from current levels.
But in truth, nobody knows. In the euro area headline inflation is close to 2 per cent, but again this is influenced by Covid factors and nobody – including the ECB – believes it will hold at this level.
Some economists argue that central banks are caught in a trap, and will be unable to tighten policy in any sustained way, given the reliance of exchequers on increasing debt. If they are right, it would suit Ireland. But it would be foolish to bank on it, as the price of being caught out would be very high.