Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

Deflation occurs if prices drop below zero but prices are still rising. The best way to consider the matter is that the mission statement of the European Central Bank is to keep inflation near to but less than 2%. It is well shy of that figure at present. There are benefits from low inflation because it reduces the cost base but it also reduces economic activity. In our case, budgets are formed on nominal growth, that is, real growth plus inflation. It makes the budgetary position more difficult when there is very low inflation because we do not get the inward tax flow. They are well down the road in debating this, however, and action is being taken. The announcements by the European Central Bank during the week before last on what it will do to combat low inflation are the first phase in this. I hope the actions will be of particular benefit to SMEs in Ireland. Frankfurt will supply a flow of money to the sovereign central banks in the eurozone at 25 basis points and a handling charge will be added before the money is made available under certain conditions to the non-mortgage lending sector. That should benefit SMEs in Ireland. There is also a multiplier effect in that by lending more money to SMEs, the banks will trigger more money from Frankfurt to provide an additional flow of funds. It is a first gradual step by Mr. Draghi in moving the European Central Bank to a more active role in monetary policy. We wonder whether there will be a phase 2, involving widespread purchasing of sovereign paper by the European Central Bank to increase liquidity across the system. That is the acknowledged orthodox way of combating deflation or low inflation.