Central Bank governor John Hurley has hinted that further interest rate rises may be put on hold by the European Central Bank (ECB) until the effects of the current market turmoil can be properly assessed.
He also said Irish financial institutions were strong and well placed to ride out the ongoing credit crunch caused by difficulties in the US mortgage market.
At a weekend meeting of finance ministers and central bankers in Porto, Portugal, Mr Hurley said monetary policy was not "predetermined" by the ECB governing council and the bank would have to analyse the current volatility before making a rate decision. "We have issued new forecasts for the euro area and this suggests a favourable situation going forward, but it has to be admitted that there is increased uncertainty because of what is happening on financial markets," he said.
"There is a good deal of volatility, there is a repricing of risk and there are dangers of overshooting in financial markets . . . Given that uncertainty, then we clearly have to look at incoming data before we can come to conclusions."
Such remarks come soon after the ECB decided not to raise rates this month above the current 4 per cent level, despite warning of the need for "strong vigilance" on price stability weeks earlier.
Acknowledging that the ECB's prime responsibility was price stability, he said it may be some time before the scale and effects of the credit crunch were known.
ECB president Jean-Claude Trichet gave little away at the meeting about the bank's intentions when it next meets to decide interest rates on October 4th. He said risks to price stability remained "on the upside" but warned that the current volatility could affect economic growth in the euro area.
Mr Hurley reiterated that Irish financial institutions could withstand the turmoil, despite the difficulties encountered by British lender Northern Rock. "We don't have similar types of issues. Our financial institutions are strong, well capitalised and very profitable, and they don't have the same exposures to subprime, either direct or indirect, and so they are not faced with the same type of liquidity problems that have arisen in the past few days."
