Ruairi Quinn (Dublin South East, Labour)
Link to this: Individually | In context

Question 49: To ask the Minister for Finance if he will table proposals to mitigate the potentially significant negative effects of deflation; and if he will make a statement on the matter. [12313/09]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
Link to this: Individually | In context

Based on the latest information available at the end of last year my Department set out its expectation that the Consumer Price Index (CPI) would fall this year by -1.0% but that Harmonised Index of Consumer Prices (HICP) inflation would be slightly positive, at 1⁄2% for 2009 as a whole. These forecasts were contained in the Addendum to the Stability Programme Update published on 9th January this year.

Since then, inflation data for December, January and February have been released by the Central Statistics Office (CSO). In addition the ECB has cut interest rates by a full percentage point significantly impacting on the CPI index, while falls in regulated energy prices have also been announced. Furthermore, the weakening economic climate has led to a fall-off in price pressures across a range of sectors. My Department now expects CPI inflation to be lower then previously expected in 2009 and could average around -33⁄4% for the year as a whole. HICP inflation is expected to be negative too, averaging around -11⁄2% for 2009 as a whole. My Department's forecasts for inflation will be published on April 7th with the Supplementary Budget.

While prices are currently falling and will on average do so this year, it is important to stress that this is not expected to continue. The reason we have entered a short period of declining prices is mainly due to large falls in mortgage interest rates as well as the fall-back in the sharp increases in energy and food prices last year. It is generally expected that both CPI and HICP inflation will be positive in 2010.

The current and prospective easing in inflation will have both positive and negative effects. It will lead to an increase in households' purchasing power, helping all but especially those on tighter budgets, and this is to be welcomed. In addition, in recent years price levels in Ireland have risen to some 20% above the rest of the euro area, which has damaged our international competitiveness. Inflation continuing below the euro area average should help us to regain some of the price competitiveness which we have lost in recent years.

That said, falling prices also means an increase in the real burden of debt so I would not like to see a prolonged period of declining prices. In the case of mortgage debt, the Government has put in place supports for households experiencing difficulties in meeting mortgage payments. For example, the Mortgage Interest Supplement provides assistance where the mortgage relates to the sole place of residence. In addition, the new mandatory Code of Conduct on Mortgage Arrears, incorporates a requirement for the lender to wait at least six months from the time arrears arise before taking legal action. In addition, the recapitalised banks have assured the Government that in the normal course they will make every effort to avoid repossessions, as indicated by the low level of repossessions by them to date.