Dr. Kieran McQuinn:

We are actively considering this issue. Our next quarterly commentary will come out at the end of this month, in which the matter will very much be addressed. When there is major geopolitical tension or an actual conflict like we currently have, there clearly is huge uncertainty around that. We do not know how long the conflict will last, how widespread it will be, the danger of proliferation to other countries, etc. That leads to a massive degree of uncertainty and, generally speaking, business does not like uncertainty when it comes to making investment decisions. Investment will be impacted in a global sense. Likewise, generally speaking, households do not like to make significant financial decisions when there is a considerable degree of uncertainty. Consumption levels will be impacted, as will trade levels generally.

There will be direct trade impacts through the sanctions against Russia and because it is a huge exporter of grain. We have seen the pressure on the grain and cereal market generally over the past week or so. There also are indirect effects. We do not have a huge volume of trade with Russia directly but we have a lot of trade with other countries that trade with it. There are potential spillover and knock-on effects in that sense. As a small, open economy, we are going to see a contraction in international economic activity, both in the euro area and outside it. There is no doubt this will have a direct bearing on the domestic economy. It has been shown time after time in studies that when there is a major international shock, it very much transmits down into the domestic economy.

The other area of impact, of course, is on prices. Energy prices, as we all know, have been escalating very sharply, having already risen quite significantly over the past six months. It is a long time since we have seen the kinds of increases in energy prices we are now witnessing. This will pose a significant challenge both to households and firms. There is no doubt about that and there is a substantial increase in inflation associated with it. Unfortunately, as we have seen, lower-income households, from a distributional perspective, tend to be hit disproportionately by that type of serious increase in inflation.

There are knock-on effects on the public finances. We have seen a number of initiatives taken by the Government, even in the past couple of weeks, all of which carry a cost. We are somewhat fortunate in that the public finances, as we said in our opening statement, are on a relatively stable path so soon after the pandemic. That gives the Government some scope to deal with these issues. As to the scale of it, we just do not know. It all depends on the scale and length of the hostilities. We are seeing a massive humanitarian issue, with millions of people leaving Ukraine. The Government has welcomed in a lot of people, which is right and proper to do. Inevitably, there will be expenditure issues around this that will have to be dealt with. There are a number of different channels through which the conflict will impact the domestic economy.

At this stage it is hard to be definitive about the exact effects. Certainly, there will be some considerable effects in the short and medium term.