No threat of deflation in Ireland - Michael Noonan

Wednesday 09 April 2014 16.36
Michael Noonan said low inflation made it harder for him to plan the next Irish Budget
Michael Noonan said low inflation made it harder for him to plan the next Irish Budget

The Minister for Finance has said he does not believe Ireland is facing a deflation threat, but admitted low inflation was making it harder to plan the Budget with certainty.

Michael Noonan also hinted that banks will need to have the right kind of financial instruments for sale if they are to benefit from any Quantitative Easing programme by the European Central Bank.

"There is no real fear in the Irish economy of deflation, but the inflation levels are very low,” he said on the International Monetary Fund report identifying deflation as the main risk to the Euro area.

“Right across Europe there is a problem with prices and inflation," he said.

"It affects me from a budgetary point of view because budgets are built on nominal growth, not real growth - that's real growth plus inflation - and there's very little in inflation for this year".

The IMF has called on the ECB to further ease monetary conditions in order to head off the risk of deflation, which it sees as the main risk to economic recovery in the Euro area. 

Mr Noonan said there has been a lot of talk about quantitative easing and countries will have to see how that goes, but the Irish Government was looking at how it would ready itself for that.  

“The mechanism would seem to be that the ECB would buy certain financial instruments in the banks - we had want to make sure we have the financial instruments in place if they are going to go in that direction," he said.

On the European Central Bank's annual report - which said the replacement of the Anglo Irish Bank promissory notes with long term bonds raised "serious concerns", Mr Noonan said it was “a very good comment”.

“It arose from a decision made at the board of governors that after a review of the position the replacement of the promissory note was in accordance with the law, and as a result there is no longer any fear that it might be deemed monetary financing,” he said.  

“Then what they said about the way the bonds are profiled, they seemed to say that their fears are allayed by the fact that the bonds mature at different times and are sold onto the markets at different times - but we knew the risks when we were designing it, and it was purposely designed that way so it would be in accordance with law".

Asked about the reports use of the words "serious concern", he said:

"We've had that kind of comment for two years now - We know there were different views among the board of governors at the central bank council and we would be fairly familiar with who took what position - it was one of the factors that delayed the arrangements for nearly twelve months but eventually it was noted unanimously, and people were satisfied that the way we designed it. At the end did not contravene EU law on monetary financing.”