Professor Michael McMahon:

Even looking at the futures curve and what is expected to happen over the next four or five years, it is expected to go from zero, or essentially where it is now with official rates, to approximately 1.25% or 1.5%. We can compare that with the United Kingdom or the United States and see it amounts to much less tightening. In some ways, from an international perspective, the ECB is doing less, partly for the reasons mentioned by the Deputy. The area is probably a little more precarious, economically speaking, and there may be worries about the negative impacts.

There are two comments I can make. The first is that we can think about it in nominal terms but in real terms, high inflation erodes the value of debt. In real terms, the cost of borrowing is still relatively low. Of course, financial conditions can change very quickly, as we learned just over a decade ago. If that happened, I am sure the ECB would step in with other measures. At the moment that is not happening and, in general, there is still availability of credit. It is just a bit more expensive, although in real terms it is a bit cheaper.

The conundrum that central banks face - not just the ECB but globally - is they all initially try to use their credibility in fighting inflation to ignore the increase in inflation. Inflation has not just occurred from February this year. If we go back to September last year, it was already up at around 5% or 6% in Ireland and it was at a similar rate around the rest of Europe. They decided to try to look through that. The geopolitical factors that have clearly kicked inflation to a new and higher level have been difficult to deal with. If central banks are not seen to be taking inflation seriously, long-term interest rates will rise anyway because markets will start to expect higher inflation and demand it anyway.

It is a difficult balance for those policymakers and it is a tough time for everyone in policy. By raising a little bit, if they can prevent the sort of inflation component going up by more, they will do relatively better in net terms.