IRISH businesses need to “think quite a lot” about how to fund themselves given higher interest rates, the European Central Bank’s chief economist has advised.
Philip Lane, the former head of the Central Bank of Ireland, told a business conference yesterday that market expectations are for rates to keep rising and to stay high.
“Given the very large increase in inflation, it has been important to raise interest rates quite a bit,” he said.
“On rates, more increases are expected and [markets expect] that rates will remain relatively high for the next number of years,” he said.
The ECB has hiked rates six times since last July as inflation soared into double digits. Its main lending rate has risen to 3.5pc and its deposit rate to 3pc.
Markets are pricing in two more rate rises this year of 0.25 percentage points each.
In the longer term Mr Lane said rates are expected to decline from their peak, but won’t go back to zero.
“What happens, if you like, five years out? Are we going back to the super-low rates that we got used to? In fact, the answer is no. The market believes that, essentially, this inflation shock is resetting the long-term equilibrium.”
Eurozone inflation cooled to 6.9pc in March, the EU’s statistics agency said yesterday, down from 8.5pc the month before but core inflation –that which excludes energy and food – continues to push higher. Using the same Harmonised Index of Consumer Prices (HICP) measure, inflation in Ireland dropped to 7pc in March from 8.1pc in February.
Mr Lane said the ECB would make sure interest rates were “appropriate for the inflation situation we face” but said decisions would depend on the data – including inflation rates and financing conditions for firms.
Hewas upbeat on global and European growth prospects and said most of the inflation seen in the last year will reverse in 2023.
He said a recession is not a necessary corollary of higher interest rates.
“We do think the combination that’s most likely is the European and world economy growing and inflation coming down,” he said.
He said it was in the interest of firms for inflation to come down.
“High and volatile inflation makes it very difficult to manage costs, difficult to set prices correctly, difficult to make plans for the coming years. It really is a very important period for many firms.”
He advised firms with spare cash to look into term deposits, as rates have gone up substantially in the last number of months.
Companies looking for funding should “maybe” turn to the bond markets if bank lending is becoming tougher, he said.
His comments came after Enterprise Ireland chief executive Leo Clancy said that some of the export growth enjoyed by Irish firms last year was down to rising prices.
Exports grew by a record 19pc on 2021 levels, reaching €32.1bn, Enterprise Ireland said.
Inflation in Ireland has slowed after a spike in February, but mortgage interest payments, energy and food prices are continuing to rise, according to the CSO.
Expectations are that inflation will slow to between 4.5-5.0pc this year and to fall further in 2024.