Dr. Robert Kelly:

I will invite Dr. Phelan to speak shortly. I will say something to respond to some of the points at a high level and Dr. Phelan might go through some of the channels. The issue we are focused on now, and the immediate issue, is with regard to passing through the pricing. Loan pricing is the big channel that monetary policy comes through first. We see two very different things in terms of households and firms and sometimes this gets a little bit lost. Firms have experienced quite strong pass through relative to history and it is consistent with what we see in the euro area. The main channel it feeds is their view on investment and how much investment they should make. Essentially, investment is being made more expensive for them. If we look at the data on how much firms are drawing down in terms of loan volumes we are already seeing a reduction in what can be classified as investment loans, which are those larger loans. This feeds into the labour market which, in turn, feeds into households. This is one of the primary channels.

The second channel is through the likes of the mortgage market. There are two elements to this. The first is with regard to the direct impact on new loans. Primarily this is with regard to house prices. There is also a consumption effect, whereby if people's mortgage rates in general go up they have to spend more on their debt so it leaves them with less to consume. This is a second channel. There are a number of other channels that operate more slowly. With regard to the question on distribution, if we look at the cohort of individuals who have mortgages in Ireland they are not necessarily the lower income households. Of course this is a generalised statement. There are mortgages across the economy. When we think about the inflationary shock, in the early stages there were rural elements that were higher because it was with regard to energy prices. The shock itself in its early stages impacted lower income households more. One of the reasons for this is that they have a different consumption basket. Higher income households tend to have more higher paying mortgages, some of which are fixed and some of which are not, and some of which are tracker mortgages. There are many compositional effects. On average, mortgage interest is paid by higher income households in society.