Analysis: We can expect to see interest rates continue to march higher this week as the ECB plans to meet again...
Households, businesses and governments are all starting to feel the pinch, and things are going to get harder before they get easier.
There were hopes, and legitimate expectations, that these supply-side pressures would gradually subside, supply would be better matched by demand, and inflation pressures would ease. Policymakers’ hopes have been dashed. Inflation has been stubbornly persistent. Having been caught flat-footed, and to avoid inflation becoming entrenched, central banks have now embarked on the fastest synchronised tightening of monetary policy since at least the early 1980s.
A further ¾ point rise is expected at its next meeting tomorrow, while financial markets expect a further ½ to ¾ point increase at its 15 December meeting. This would bring interest rates to what economists call ‘neutral’. Even before Russia’s invasion of Ukraine, the UK was heading into a number of years of weak growth, partly due to the post-Brexit shakeout. The impact of the war, and their recent bout of budget hara-kiri, makes a recession there nearly inevitable, while recovery may be slower than elsewhere. The rest of Europe is heavily dependent on energy imports which have become significantly more expensive. This means weaker trade balances for countries and less money for consumers to spend on other items.
In many ways, however, Ireland is in a better position relative to a lot of other European countries, and certainly with respect to the Ireland of 2007 on the eve of the financial crisis. Underlying economic growth is stronger than in many other European countries, while our public finances are in better shape. This means the government will likely have room for manoeuvre in terms of extra cost-of-living measures in 2023.
Even though housing supply remains significantly lower than housing need, effective demand – that is, what buyers can pay – is likely to decline. This will inevitably weigh on house prices. That house price growth will slow is inevitable. That house prices will increase more slowly than consumer prices, such that real house prices fall, is likely in 2023.