Honohan sees 'stronger tone' to European economy
Governor of the Central Bank of Ireland Patrick Honohan said he sees a "stronger tone" to the European economy and has no immediate concern about inflationary pressure.
“There is a stronger tone to the numbers, suggesting that it was good news,” Honohan said in Tokyo today, referring to second-quarter gross domestic product in Europe.
“There is every indication that inflation expectations are steady, are not moving around, and the projection of actual inflation is still well within where we would like it to be.”
Europe expanded 1pc last quarter, more than economists forecast, as the fastest growth in Germany in two decades powered the recovery. Inflation in the region accelerated to the quickest in 20 months in July, potentially complicating the ECB’s gradual withdrawal of stimulus measures.
Consumer prices in the euro-zone increased 1.7pc in July from a year earlier, the most since November 2008. The central bank aims to keep annual price gains just below 2pc and President Jean-Claude Trichet said he will announce next month how the ECB will scale back its program of unlimited loans to banks that was implemented in 2008.
Media reports show ECB policy makers are divided on the risk posed by inflation. Governing Council member Athanasios Orphanides told Reuters that he’s “not worried” about inflation driven by energy prices, while his colleague Guy Quaden told La Meuse newspaper that the ECB needs to be “more attentive about this issue.”
Honohan also commented on budget cuts in Ireland, saying the country may benefit from indicating details about future adjustments early. With the fiscal deficit surging in Ireland, the government has pledged to make a further €3bn adjustment in 2011.
“There could be some advantage in advising the market early what the detailed measures will be” before the plan is scheduled to be announced in December, Honohan said. After Greece, Spain and Portugal unveiled austerity measures earlier this year, “the market has, to some extent, been looking to Ireland and saying, well, what are your next messages?” he said.
Concerns over the total cost of the bailout of Anglo Irish Bank led to a surge in Irish borrowing costs last week. The premium investors demand to hold Ireland’s 10-year debt over comparable German bonds climbed almost 50 basis points last week, and reached 299 basis points August 16.
Investors “are not fully reading the bank restructuring situation correctly,” Honohan said. “How can we justify a 300 basis-point differential?”
The European Commission last week gave the government permission to pump as much as €24.5bn into Anglo, more than the €22bn that Finance Minister Brian Lenihan previously said the lender may need.