john hurley : economic developments in ireland and other issues opening statement by mr john hurley, governor of the central bank of ireland, at the presentation of the annual report 2001, dublin, 10 june 2002. * * * you are all very welcome. as you know, this is my first press conference as governor of the central bank. today, we are publishing the bank ’ s annual report for 2001. i want to focus briefly on seven issues - economic growth, inflation, fiscal policy, monetary policy, supervision, the bank ’ s financial results and financial stability issues. 1. economic growth the economic overview in the report reflects our concerns after a challenging year. we saw a marked slowdown in growth in the world economy and also here at home, for reasons that are well known. export volumes were seriously affected, the it and tourism sectors suffered particularly and the growth in capital formation was much reduced. however, a strong positive factor was the continuing growth in consumer demand. looking ahead, the bank ’ s view of the economy remains positive but depends on the pace of international recovery. we expect growth of about 3 per cent this year. our continuing potential is for growth of some 4½ to 5 per cent per year. 2. inflation undoubtedly a key risk to growth is inflation, with its potential to seriously impact on the country ’ s competitiveness. our consumer price inflation has been consistently higher than the euro area for two and half years - to the order of 2 percentage points above the average. 3. fiscal policy you will not be surprised therefore that we are advising prudent fiscal policy and attention to wage and other cost developments. fiscal policy should aim to ensure a neutral stance in its impact on the economy. the bank is also advising wage moderation, so as not to damage our competitive position. we will have more to say on these issues in our summer bulletin, which is due out later in the month. 4. monetary policy i would now like to comment briefly on the european scene, in the light of last week ’ s governing council meeting. as you know, at our meeting, the governing council decided to leave the key ecb interest rates unchanged. the economic outlook in the euro area is still subject to uncertainty. we decided that further evidence is needed before we can fully assess the risks to price stability over the medium term. however, the outlook remains less satisfactory than originally expected some months ago. the recent appreciation of the euro will contribute to containing inflationary pressures if it is sustained.

in place until we consider the covid - 19 crisis phase to be over. let me next turn to the ecb monetary policy strategy review. after being postponed due to the crisis, the review was re - launched last month, and it is expected to be completed by september next year. the essential underlying reason for the strategy review is the profound structural changes in the euro area and in the global economy. these include, in particular, the change in the relationship between the spare capacity of the economy and inflation, as well as the long - term decline in the natural interest rate and the sluggish productivity growth. the lower natural interest rate has reduced the room for interest rate cuts, as the effective lower bound lays the floor for them. however, non - standard policy measures have alleviated this constraint to some extent. a reassessment of the ecb ’ s monetary policy strategy is all the more necessary given both the long - term low inflation – or ‘ lowflation ’ – and the damage wrought by the covid - 19 pandemic. 1 the strategy review will cover a wide range of subjects, including climate change and digitalization, and it is supported by in - depth analyses of the forces that drive inflation dynamics today – or rather, slow them down. one of the key issues of the review and of monetary policy 1 / 2 bis central bankers'speeches today is inflation expectations, and how they should or could be correctly anchored. in the early years of its operation, the ecb was seeking to establish credibility in an operating environment in which too high inflation was the main concern. this led to the ecb successfully capping inflation expectations by aiming for inflation of “ below, but close to, 2 % ”. however, in the current environment of chronically low inflation, it is more important to ensure that inflation expectations are not anchored at too low levels. today, that is regretfully the case, which has been amplified by the perceived ceiling and asymmetry in the price stability definition, as demonstrated in a recent paper by bank of finland researchers. 2 to underpin inflation expectations, the first thing to do is to make sure that our inflation target is defined as symmetric – and in particular that the public understands it as symmetric. my way of thinking is thus largely similar to that expressed by president lagarde in her recent speech. 3 in other words, what we need is, first of all, a clearly and genuinely symmetric price stability target, and secondly,