THERE WILL BE MORE PAIN
Households face strain as Ukraine crisis hits oil prices and ECB gets set to hike interest rates
CABINET ministers believe the European Central Bank will move to hike interest rates.
Senior Government sources this weekend warned the expected rise in rates will heap further pressure on householders already struggling to cope with the soaring ing cost of living.
One minister told the Irish Mail on Sunday: ‘We’ll see the European Central Bank (ECB) beginning to turn the dial and start talking about interest rate hikes and then they’ll come under immense pressure to start signalling a shift in monetary policy, and they’re beginning to make some noises already.
‘Increased interest rates have a knock-on effect. They are positive for savers and create huge cost savings in the system.
‘And of course they are a negative for tracker mortgages immediately, and possibly variable and fixed-rate mortgages as well. That will have a
‘If Russia and Ukraine kicks off, all bets are off’
huge impact on Government borrowing because we’ve refinanced a huge amount of debt.’
The Coalition came in for criticism this week after it announced a €505m package to combat rampant inflation.
Labour leader Alan Kelly described the measures as ‘a sticking plaster’ and ‘a drop in the ocean’. However, the Government believes it can get as far as the October Budget without requiring another intervention.
Several senior ministers told the Mail on Sunday this weekend that they expect to ‘hold their nerve’ as external forces such as interest rate changes and falling energy prices kick in.
However, one minister warned ‘there will be pain’ as the end of Covid supports take money out of the economy and have a deflationary effect.
Cabinet sources also ruled out any immediate moves for a ‘mini-budget’ in response to the cost of living crisis. But senior Government figures stressed ‘all bets are off’ in the event Russia invades Ukraine.
The Government yesterday followed the
United States and Britain, as well as many other countries, in urging Irish citizens to leave Ukraine. The US has withdrawn diplomatic staff, citing intelligence reports that an invasion is likely, and sparking fears that soaring energy costs are set to rise even higher.
There was widespread criticism of the Government’s decision this week to grant a universal payment of over €200 to all households.
Opposition parties said the Coalition should have opted for ‘targeted’ payments to help the most needy instead.
Responding to the criticism, Tánaiste and Enterprise Minister Leo Varadkar insisted that the payments would help the ‘squeezed middle’.
A Cabinet source told the MoS: ‘There’s no winning on it. It’s a lump of cash. You can call it helicopter money if you want. We hear the criticism that the bulk of it is not targeted, but it had to be done quickly.’
Like governments across the world, the Coalition is unsure of how high inflation rates, which surged to over 5.5% in Ireland this weekend, will rise.
A senior official at the Department of Finance told the MoS: ‘We don’t know what direction inflation will go in the coming months. The forecasters have been wrong – they thought it would ease quicker – so I think it’s going to be higher for a longer period.
‘So it could get very, very challenging if we see inflation at this level or possibly higher, you know, for many months and it’s possible and that will lead to all sorts of issues like wage demands.’
Department of Finance sources said international energy prices are hitting Ireland hard.
A source noted: ‘Oil is at $90 a barrel, expected to go to $100. The United States saw a 7.5% increase in inflation last month. And everything US President Joe Biden has tried to do hasn’t worked and they actually have control of the monetary policy.’
Asked if a mini-budget was on the cards before October, to deal with social welfare rates and taxes, a source added: ‘We’re just keen to get as far as October and not require another Budget.’
A minister added: ‘We’re not even thinking about an intervention. But you just never know what direction things will take. October is a long way away.
The general view is that it will peak and start to ease. But look, you know, if Russia, Ukraine and all of that kicks off, all bets are off. Everything is torpedoed if that happens.’
Another Cabinet source told the MoS: ‘We have to hold our nerve. We can’t just go pushing out a half billion euros every few months to stave off inflation and other challenges.
‘Yes, it’s clear to the public over the last decade that the Government can move when it has to. Look at the bank bailout, Covid supports and what we did last week… but we have to be prudent.’