The decision of the European Central Bank to increase euro zone interest rates again comes as little surprise. The rise had been well flagged and it was only a question of whether rates would rise at yesterday's meeting, or whether the ECB would hold off for another fortnight. Concerned about the pick-up in inflationary pressures - and the fall in value of the euro - the ECB decided to move yesterday, pushing up its base interest rate by a quarter of a percentage point to 3.75 per cent.
The increase will be passed on in due course to borrowers and savers here. Those who took out loans in recent months can hardly complain that they have been taken by surprise. It has been clear for some time that base euro zone interest rates were on the way up. They are likely to rise yet further in the months ahead.
Whether the latest increase will do anything to slow the rise in borrowing by the public for mortgage and other loans remains to be seen. There can be no doubt that if the Central Bank still had control of interest rates they would be considerably higher, as policy-makers here would have moved to try to take the steam out of the property market and to slow the overall growth of the economy through substantially higher borrowing costs.
However, the ECB is operating to a different agenda. The gradual increase in interest rates of the last few months has been designed to try to hold down inflation as the main Continental economies enter a period of economic recovery. The markets believe that they are also an attempt to prop up the ailing euro. This is a perception which the ECB is keen to avoid but nevertheless the euro sank further yesterday following the rate increase, as the markets gave their verdict on what they see a lack of credibility. The continuing decline in the value of the euro is causing inflationary pressures in these economies, but not to the same extent as in the Republic, which has a much higher reliance on imports. And while the Irish economy goes through a period of boom, the larger euro zone economies are in the relatively early stages of an economic pick-up which the ECB is trying to nurture, while at the same time keeping a lid on inflationary pressures.
This causes difficulties for policy-makers here. They can not rely to any extent on the traditional tools of monetary policy management - in other words they have no control over interest rates or the level of the currency. And the extent to which the overall level of economic activity can be influenced by taxation measures is open to question. Calls from Europe and elsewhere on the Government to cool the economy by using fiscal policy ignore the fact that doing so would require substantial and potentially destabilising cuts in spending or increases in taxes. This does not mean that policy-makers here are powerless. The Government must hold against demands for big increases in public sector pay which, if they knocked on throughout the economy, could have a detrimental long-term impact on competitiveness. It also has a crucial policy agenda in addressing the issues of transport and housing, both vital if the economy is to prosper in the long term.