Honohan warns of deflation risk

The head of the Central Bank has said he is concerned about low inflation across the eurozone and warned that the Government must stick to budget targets following the EU-IMF bailout exit to retain market support.

The European Central Bank (ECB), where Governor Patrick Honohan is a board member, “has been concerned about low inflation not only in 2014 but in the forecasts for 2015 and 2016,” he told reporters yesterday.

Speaking at the release of the Central Bank’s annual report, Mr Honohan, pictured below, said it’s important that European authorities “use all effective tools in an effective way”. That will be seen as a sign that he favours more aggressive action such as quantitative easing to combat the risks.

The ECB meets next week and many analysts expect its governor, Mario Draghi, and other board members to vote for radical steps to counter the perceived threat of deflation (see story to the right).

CRUCIAL

Deflation, or falling prices, is seen as one of the most pernicious economic problems because it can be self-fulfilling – if households and businesses believe prices will fall they typically delay spending, driving prices even lower.

In relation to the Irish economy, Mr Honohan said it was “absolutely crucial” that the Government sticks to the current fiscal targets following exit from the bailout last year.

He also said he was satisfied with stress-test scenarios announced by the European Banking Authority for Irish lenders but refused to be drawn on whether he believes banks here are likely to pass the tests.

Any such speculation would be unhelpful, he said.

Yesterday, the Central Bank finally launched the tender for a main contractor to build its new headquarters in the IFSC, Dublin, in the abandoned site originally planned for Anglo Irish Bank’s former headquarters

Mr Honohan said the cost will be a multiple of the €8m the Central Bank paid NAMA for the property two years ago.

The Central Bank is now seeking to shortlist a maximum of seven contractors and, according to tender documentation, the bank hopes that construction work will commence in the first quarter of 2015.