john hurley : a central banker ’ s perspective of the irish and international economic situation speech by mr john hurley, governor of the central bank of ireland, at the finance dublin conference, dublin, 25 march 2003. * * * the international and euro area economy this is a time of exceptional uncertainty in the world economy. this uncertainty has been driven by a number of factors, notably the deterioration of equity and financial markets during 2002 and more recently, rising geopolitical tensions and the ensuing war in iraq. as a result, the outlook for global economic growth has weakened compared with earlier expectations. the impact of the war in iraq on the global economy will depend on the extent and duration of the conflict. the range of scenarios is wide but one can characterise two contrasting situations. in one case, a prolonged conflict could trigger a marked increase in oil prices and undermine consumer and business confidence, slowing consumption and investment spending and leading economic growth to weaken. alternatively, a short and decisive conflict would eliminate the uncertainty that now exists. it is not possible at this point to assess conclusively the implications for the euro area. but the governing council has made it clear that developments will be monitored closely, that it stands ready to act if necessary and will provide liquidity should that be required. the geopolitical situation masks the fact that, by historical standards, this has been an unusual economic recovery. evidence from the past half - century suggests that typically a recovery in economic growth is driven by rising equity prices and falling savings rates, in addition to low interest rates. over the past year, however, equity markets have weakened further, while savings rates have risen. these developments reflect to a large degree an attempt to correct the problems of the past, in particular the significant economic and financial imbalances generated during the preceding boom in the us. the current account deficit has, moreover, continued to grow and is now being driven by the emergence of a sizeable fiscal deficit. ultimately, this situation has to be corrected, and this will undoubtedly have implications for the rest of the world. with the external impetus to growth likely to be modest, euro area growth will have to be driven largely by domestic demand. however, the recent track record of larger euro area economies is not encouraging. their underperformance has acted as a headwind to sustainable economic recovery and this situation may change only gradually. in summary, i would remain concerned that, even in the event of an unwinding of geopolitical tensions, euro

. 22 new tools, same outcomes another challenge the committee – and broader bank and fiscal authorities – have faced is the design, implementation, assessment and explanation of additional monetary policy tools. on the explanation front, a significant challenge has been the singling out of the new tools as the cause of house price inflation. however, correlation is not causation, and there is much more to a modern monetary system than meets the eye. 23 the additional monetary policy tools we utilised over recent quarters do nothing more than assist to lower interest rates in the economy, across the yield curve. it is then up to financial institutions and individuals to decide how to utilise the lower interest rate environment. our large scale asset purchase ( lsap ) programme affects long - term interest rates through the exchange with retail banks of new cash reserves ( settlement accounts at the reserve bank ) for their holdings of government bonds. in doing this we reduce long - term interest rates by creating additional demand for government bonds. the level of government bonds on offer however is determined solely by the fiscal authorities – not the reserve bank. likewise, the amount of bonds the committee chooses to buy or sell remains the exclusive decision of the committee – not the fiscal authorities. monetary and fiscal policy remain operationally independent and for good reason. review and improve the reserve bank is continually considering how we can improve the implementation and formulation of monetary policy. while our monetary policy remit sets our current objectives for monetary policy, the new rbnz legislation requires the reserve bank to review the framework for monetary policy every five years. this follows monetary policy framework reviews in recent years by the federal reserve, european central bank and the bank of canada. the purpose of these regular ( 5 - yearly ) reviews is to ensure we are an accountable and transparent central bank, the monetary policy framework remains fit for purpose, and the monetary policy committee is well placed to achieve our objectives. this will be an opportunity to consider how the reserve bank balances our inflation and employment objectives, and what weight, if any, should be put on secondary considerations such as distributional impacts and housing. our review process – which is now underway – has two parts : a backward looking review and assessment of monetary policy performance over the last five years, which will consider how monetary policy performed during the pandemic period ; and, the formulation of ‘ remit advice ’ for the minister of finance on whether we believe there are any changes required to the remit when it must next be renewed. _