John Hurley: Economic developments in Ireland and other issues
Opening statement by Mr John Hurley, Governor of the Central Bank and Financial Services Authority
of Ireland, at the presentation of the Annual Report 2003, Dublin, 12 July 2004.
* * *
I would like to welcome you all to the publication of the Bank's Annual Report for 2003.
As you know, 2003 was a very significant year for us. We have been through a major restructuring
process, which has seen the establishment of a new financial regulatory system. The Irish Financial
Services Regulatory Authority is now responsible for consumer protection and prudential supervision
while the Central Bank deals with all matters relating to Financial Stability. I am happy to report that
these new arrangements, which are in place for over a year now, are working very well.
This restructuring has allowed us to take stock. As a result, we are also today publishing a three-year
Strategic Plan for the Central Bank and Financial Services Authority of Ireland. A further important
development will be the publication of a stand-alone Financial Stability Report in mid-September. Up
to now, this was included in the Bank's Annual Report.
I would also draw your attention to the reproduction in this Report of the first lecture in the Whitaker
lecture series. This series has been established in honour of the former Governor, Dr. T. K. Whitaker,
and is intended to contribute to general economic debate in Ireland. The inaugural lecture was given
by the President of the European Central Bank, Jean Claude Trichet. The Report also includes an
article on Foreign Direct Investment in Ireland, a vital component of our recent economic success. The
study highlights the principal reasons for our success in this area: a stable macroeconomic
background, a favourable business environment in its many aspects and a strong emphasis on
education and skills. Looking to the future, we need to ensure that we have the appropriate policies in
place to continue to be an attractive location for Foreign Direct Investment.
Economic developments
Turning now to the economic situation: in the context of a weak, if improving, international
environment, the Irish economy performed well, relative to other countries, in 2003. The latest official
data put GNP growth at 2.8 per cent (GDP, 3.7 per cent). There was significant employment growth
last year, which contributed to keeping unemployment at a low level - currently 4.4 per cent.
For 2004, Ireland's growth prospects appear generally good - particularly as the US and East Asia
economies improve. However, considerable uncertainties remain. Global imbalances continue to pose
a risk of a sharp adjustment of exchange rates with implications, in particular, for the US dollar/euro
exchange rate. A second significant uncertainty surrounds oil prices, which continue to be subject to
the influence of geo-political tensions in the Middle East. While recognising the implications of these
risks for our economy, we have revised our forecasts for GNP up to 41⁄4 per cent (GDP growth, 43⁄4 per
cent) this year. The contribution to growth by different sectors is fairly broadly based with services,
manufacturing and construction all showing significant output increases.
There were positive developments in inflation during 2003 and into 2004. By early 2004, inflation was
running at a rate close to that of the euro area generally. The current inflation forecast for this year is
21⁄4 per cent for both measures of inflation - the CPI and the HICP.
Turning to the outlook for 2005, the acceleration in world economic activity should result in higher
growth here. The forecast growth in Ireland's GNP is put at 5 per cent (GDP, 51⁄4 per cent). Ireland's
inflation rate is forecast to increase slightly to 23⁄4 per cent (CPI) with HICP inflation of 21⁄2 percent.
Experience here and elsewhere shows that it is quite difficult to bring inflation under control once it
takes hold. There is generally a high degree of persistence in inflation as inflationary expectations tend
to become embedded. In our own case, inflation has been, on average, over 2 percentage points a
year higher than in the euro area for the five years since the inception of the single currency. It has
taken some time, and it has not been easy, to reduce our inflation rate to that of the euro area
generally. With the economy in an expansionary phase, it is important to secure this low inflation
environment. The maintenance of a competitive economy is particularly important in order to ensure
that Ireland remains an attractive location for foreign direct investment. The success we have had in
attracting foreign direct investment could be undermined if inflation were to pick up significantly again.
This is all the more important since our price levels are already higher than those of our trading
partners.
Looking beyond the next few years to the medium-term, the economy's growth potential is likely to be
somewhat lower than in the recent past. There are two main reasons for this. Firstly, the scope for
employment increases is less than in the past, given the earlier large increase in the participation rate
and the current low rate of unemployment. Secondly, productivity increases over the past decade or
so were boosted by structural changes in the economy which involved transferring labour from low to
high productivity sectors, notably in the high-technology areas. The scale of this cannot be continued
in the future. This would suggest that growth potential in the medium-term would be at the lower end of
the 4 to 5 per cent range. It is important that expectations are adapted to this somewhat lower, but still
very satisfactory, rate of potential growth over the medium-term.
Credit growth continues to be a worry. In May, Ireland's adjusted private sector credit growth rate of
23 per cent was four times the euro-area rate of 5.8 per cent. If such divergent rates of increase were
to persist, Ireland would become one of the most indebted countries in the euro area within a few
years. This increase in credit has mainly been accounted for by mortgage credit. The Bank remains
concerned at the continuing large increases in house prices - currently running at 12 to 13 per cent -
especially in the light of the substantial increase in housing supply. If the increase in prices were to
continue, the risk of a significant correction would increase.
Monetary policy and the euro area economy
Current prospects for the euro area economy are reasonably positive. With external demand
remaining strong, growth is expected to average 1.7 per cent this year and 2.1 per cent in 2005.
Largely due to higher oil prices, inflation will be above 2 per cent this year and into the early part of
2005. I feel however, that on balance, the current evidence points to inflation in the euro area being in
line with price stability over the medium-term.
Supervision
This Annual Report contains a review of financial supervision issues covering the period from the 1st
of January to the 30th April 2003, with a short summary of activities from May to December 2003. In
accordance with the new legislation, the Financial Services Regulator will publish its own Report
covering the 20-month period from the 1st of May 2003 to the 31st of December 2004 in mid-2005. In
the meantime, the Financial Services Regulator published a Progress Report in June of this year
outlining its first year of operation. In addition to supervising financial institutions from a safety and
soundness viewpoint, a comprehensive regulatory structure for consumer issues was put in place
during 2003 with the appointment of a Consumer Director as provided for in the legislation.
Financial results
The Surplus Income paid by the Bank to the Exchequer in respect of 2003 is €321.7 million. This
amount comprises €69 million in profits before unrealised gains and €258 million transferred from
pre-EMU exchange rate gains, of which €108 million was in respect of unrealised foreign exchange
losses in 2003 due to the appreciation of the euro. The only transfer to reserves from profits was a
transfer of €5.4 million to the Superannuation Reserve. In addition, €78 million proceeds of the coin
issue were paid to the Exchequer by the Bank in 2003.
Strategic plan
Today, in addition to the publication of our Annual Report, the Central Bank is issuing a three-year
Strategic Plan. This is a comprehensive piece of work and provides us with the opportunity to outline:
• the role and responsibilities of the Central Bank, both in the Eurosystem and domestically;
• the nature and purpose of our work; and
• the plans for new initiatives in the future.
Since our entry into the Eurosystem, there has been a significant change of emphasis in our work,
towards a greater focus on Eurosystem responsibilities. We have, of course, undergone a major
change in our structure and the Strategy gives us the opportunity to clarify our role vis-à-vis the
Financial Services Regulator and to reinforce the cooperation between us in areas of common
interest.
Articulating our Strategy now is very timely, as we can now draw on five years of experience in EMU
and as the Eurosystem is facing up to challenges of expansion. Our Strategy was developed following
a comprehensive consultation process throughout the organisation. We have defined specific strategic
actions, which will be implemented over the next three years.
For any of you who have a particular interest in this issue and would like more information, we would
be glad to arrange a meeting with Ann Marie McKiernan who was heavily involved in preparing the
Strategy.
Before concluding, I would like to thank the members of the CBFSAI Board of Directors for their work
and help throughout the year. I also greatly appreciate the dedication and commitment of the staff who
have ensured that the reorganisation has been such a success. I would also like to thank the
Chairman, Mr. Brian Patterson, and the Board of the Financial Services Regulator, with whom we
have worked closely to ensure a smooth transition to the new organisation.
I am also pleased to say that the 2003 Annual Report is available simultaneously in both Irish and
English.
This concludes my opening remarks. My colleagues and I are now available to answer questions.