IRISH inflation is well within Maastricht guidelines and may leave the Central Bank room to cut interest rates if the Bundesbank announces the expected reduction in its rates.
The inflation rate was running at 2 per cent in the year to mid February, 1996, down from 2.4 per cent in the year to mid November, 1995, according to yesterday's quarterly figures from the Central Statistics Office. The quarterly increase in prices was 0.4 per cent.
Analysts had expected an annual rate of 2.1 or 2.2 per cent and said that they may encourage the Central Bank to follow cuts in German rates.
According to the new EU interim indices of consumer prices (IICP), which strips out mortgage payments among other items, inflation was running at 2.1 per cent, just slightly higher than the headline CPI figure.
To meet the Maastricht criteria, the rate in 1997 must be within 1.5 percentage points of the average of the lowest three countries. On the latest figures Ireland meets this criteria, as the average of the lowest three states is 1.06 per cent, meaning the limit is 2.56 per cent.
Inflation remains low despite strong economic growth. The latest CSO figures published yesterday show that manufacturing production fell 0.5 per cent over the month after posting a 3.2 per cent increase the previous month. However, on an annual basis it was still running a strong 23.1 per cent ahead of the same month the previous year.
Mr Jim Power, chief economist at Bank of Ireland Treasury, said the latest inflation figures were a "superb outturn". He had been expecting a figure of 2.1 or 2.2 per cent. "This allays any fears the Central Bank may have had about inflationary pressures building up," he added. "Inflation is not a problem in an Irish context the reality is that the inflationary back ground is very benign."
The figures come after the Central Bank's warning last Thursday that it may not follow any cut the Bundesbank makes for fear of stoking up inflation. Those fears appear to have been overdone.
Mr Power said he now expected the" Central Bank to follow any cut which the Bundesbank makes. However, he warned that if the Bundesbank cuts the key discount rate by half a percentage point the Irish authorities may only follow up with a quarter point cut.
Lower clothing and footwear prices, as well as falling mortgage interest payments, contributed to the lower than expected inflation figure. The 0.6 per cent increase in food prices for the quarter was also less than expected.
Budget tax increases on tobacco and alcohol drove the rate higher. "Without indirect taxes the underlying picture is better still," said Mr Power.
However, a rate cut still depends on the Bundesbank. Mr Jim O'Leary, economist at Davy Stockbrokers, warned that a cut in Germany "cannot be taken for granted".
One reason is that German industry raises 70 per cent of its money in the long term markets. "A cut in short term rates would _do nothing positive for long term rates and could even be counter productive," said Mr Power.
The Bundesbank is also expected to look carefully at the February money supply figures due later this week. Some analysts are expecting these to be stronger than in January, which would delay the timing of cuts.
Figures for US housing starts were stronger than expected yesterday and the market is now waiting for retail sales figures. The markets is expecting a strong rebound in February to one per cent. "Anything stronger would add to bond market volatility," Mr Power warned.
Irish institutions have now revised their inflation forecast for the year to 2.2 per cent.
