Professor Patrick Honohan:

The thing about this whole central banking area is a question of balancing. The Central Bank looks for a rate of inflation below but close to 2%. Prices falling are not good and neither are prices rising. We want to get somewhere in the middle. The reason quantitative easing has been adopted is that the way things were going, including oil price rises and the weak demand in the euro area, prospective inflation was getting lower and lower and expectations of future inflation were getting lower and lower. People were beginning to not believe that even on a medium-term horizon the ECB could get back to 2% but that, instead, it would be bouncing around 0% or negative. Step-by-step additional actions were taken, and quantitative easing, which involves the purchase of large quantities of Government bonds from throughout Europe, is a tool which has been reasonably effective in the US, Britain and Japan, so why would we not use it? Not using it would make it seem as though the ECB did not really care, so we definitely had to use this tool. Does it risk pushing things in the other direction? If one has been pushing and pushing and not getting there and then one uses a very strong tool, I suppose there could be some risk of this type, but this would emerge not so much as an overshoot of price inflation, but as a risk that people might take excessive gambles with money that is almost free.

What is the benefit to Ireland and when we have seen the problems caused by money that is almost free? Fortunately - we have spoken about this - money is not free for standard variable rate mortgage holders, so they should not worry about it. That is just to be facetious. In Ireland, where this is really having an effect is not in the availability of borrowing for builders or home owners but in the low cost of refinancing the Government's debt. The NTMA has already refinanced loans from the IMF, which were yielding more than 5%, to a very low interest rate. It has an effect on the channelling of the profits of the Central Bank, which is a very large sum of money, and will continue over a number of years. This really strong benefit to the public finances has been a boon to Ireland, where over-indebtedness of public finances is a burden.

In addition, tracker mortgage holders have seen this come through immediately. Many people in Ireland are paying approximately 1%, and sometimes even lower than 1%, on their tracker mortgages. These include people who borrowed at the height of the boom, and probably borrowed more than they ever should have, and it is certainly easing their budget. They will not go out and buy another house. They will find it possible to do things they were not able to do because they were scrimping and saving to pay. The ECB did not do it for an over-indebted economy. It did it to generate additional demand and make sure prices came back to the 2% target, but it has been an unmitigated plus for the Irish economy.