08 Nov 2019

Irish Economy: Annual inflation rate declines to 0.7%

Inflation in Ireland remains subdued according to the latest data from the CSO.

The annual rate of inflation, as measured by the CPI, fell to 0.7% in October from 0.9% the previous month. Goods prices were -1.8% y/y in October, while services prices were +2.7% y/y in the same period. The areas causing the most upward pressure on the annual inflation rate were Restaurants and Hotels (+2.6% y/y), reflecting higher prices for accommodation and food/drink, and Housing-related items (+3.2% y/y), reflecting higher rents and mortgage interest payments (we suspect this may reflect a declining proportion of tracker mortgages in the CSO’s sample). In the other direction, the area with the greatest downward pressure on prices were Communications (-6.5% y/y) due to lower phone charges, and Transport (-0.9% y/y), reflecting lower airfares and fuel prices. 

Excluding a few months earlier this year, the inflation rate in Ireland has been below 1% for more than six years now. With average earnings in the economy increasingly strongly at present (+3.5% y/y in Q2), low inflation is contributing to material improvements in households’ finances.

No change

The Bank of England (BoE) held Bank rate steady at 0.75% today, as expected by economists including ourselves. There were also no other changes made to key policy elements, with the QE (gilts) total held at £435bn and the corporate bond buy total maintained at £10bn. 

However, the vote on the “on hold” interest rate decision was met with two dissentions, with Michael Saunders and Jonathan Haskel favouring a cut in interest rates at November's meeting. The key shift in the tone comes from global headwinds whilst Brexit uncertainty also remains a concern, unsurprisingly. Specifically the BoE said it may need to “reinforce” the expected recovery in the UK economy through monetary policy if global growth fails to stabilise or if Brexit uncertainty remains entrenched. Note that the BoE is also still keeping markets alert to upside risks and the prospect of a tightening, flagging that if risks do not materialise and the economy performs in line with forecasts “gradual and limited” rate rises may be needed. 

Bias now toward easing

The committee’s general tone, plus the fact that two members voted for a cut, suggests that the bar for an easing is somewhat lower than we had thought. That said, the indications are that Washington and Beijing could sign phase one of a trade deal relatively promptly, with talk of the reversal of some of the more recent tariff increases. Such a prospect has clearly supported world markets and should help to boost global economic activity, should both sides reach an accord. 

Furthermore we will scour economic data for signs that lower interest rates and fiscal boosts in various areas are finding some traction. Our central view is that the MPC will avoid cutting rates and keep them on hold at 0.75% until mid-2021, at which point we expect an increase. Still the downside case is very visible, including a continued risk that in some shape or form, the UK leaves the EU without a comprehensive trade deal. Given the relatively dovish tone and the fact that there were two votes for looser policy yesterday, sterling has held up relatively well, with the benchmark EUR/GBP rate still sitting comfortably in/around the £0.86 level.


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