On its own, this week's quarter per cent rise in interest rates will not seriously affect most mortgage holders. However, it comes on top of two comparatively recent rises, and in advance of at least two more expected increases. This monetary tightening coincides with signs that the economy is slowly changing for the worse.
Far from subsiding from a recent surge, last Thursday's consumer price index suggests that we may be returning to a period of sustained high inflation. From a relatively low rate of 1.6 per cent in 1999, poorly timed tax cuts and a pre-election spending binge brought inflation up to a sustained average of 5 per cent in the period 2000 to 2002, the genesis of what is colloquially referred to as "Rip off Ireland".
A year before the next election, it is hard to avoid a sense of deja vu. Inflation has risen from 2.5 per cent last year to 3.9 per cent in May. Oil prices and interest rate rises are only part of that story. But the acceleration in inflation reflects dramatic rises in the prices of domestic goods and services. Considering the sheer momentum of money set to enter the economy in the coming 12 months - borrowing of €60 billion, maturing SSIAs of €14 billion and extra Government spending of €5 billion - it is hard to see inflation slowing. Designed by the Government to coincide with the run-up to the next election, SSIAs and strong public sector growth are prime suspects in explaining why Irish inflation has climbed substantially above the euro zone average in recent months.
At the same time, private sector borrowing continues to grow unabated. But consumer sentiment has fallen dramatically in recent months and with the ECB this week signalling further interest rate rises later in the year, younger and more highly indebted borrowers will find their spending potential reduced.
Some 90,000 jobs were created in the economy last year, mainly in the construction and public sectors. The latest AIB survey of the housing market reveals a sharp drop in housing commencements, reminding us that this sector cannot be taken for granted forever. The rise in public sector employment is hardly grounds for congratulation. In the manufacturing sector, which is more exposed to competition, job losses are running at a rate of 1,000 a month. If our economy deteriorates in the run-up to the election, some politicians might try to pin the blame on the ECB. This would be unfair.
ECB rate rises to date have not stopped the momentum of our economy. Nor were they designed to do so. The ECB must make its actions proportionate to the needs of the euro zone as a whole. The terms of the monetary contract that Ireland entered into in 1999 require individual governments to manage their economies in a sustainable and responsible way. The ECB's measured and responsible approach to its mandate stands in stark contrast to the approach of the Government to managing our economy, an approach which runs the risk, once again, of being a showcase of irresponsible electoral opportunism.