mr. o ’ connell reports on the irish economy and different aspects of the central bank of ireland ’ s activities statement by the governor of the central bank of ireland, mr. maurice o ’ connell, to the joint committee of the oireachtas ( parliament ) on finance and the public service in dublin on 18 / 2 / 97. i thank you for your invitation and i welcome the opportunity to appear before this committee. internationally, the economic outlook remains generally good. while the crisis in asia has reduced forecasts, there is still optimism that reasonable growth with low inflation will continue. worldwide, there is a strong consensus on the merits of price stability and reduced budget deficits as the best platform for growth and employment. in europe, the picture is mixed. in general, there has been some improvement in the past half year and a growth rate not far off 3 per cent on average is predicted for 1998. the prospects for substantial reductions in unemployment in the short term remain disappointing. unemployment in europe is seen largely as a structural problem that can only be resolved over an extended period. on the positive side inflation has been subdued and interest rates are relatively low. as we move towards the deadline for decision on membership of emu, there is a great awareness everywhere, in shaping policy, of the requirements to satisfy the entry conditions. the irish economy ireland ’ s position is unique at the moment by european standards. economic growth has continued to exceed expectations. the central bank expects that growth this year will be of the order of 7 to 8 per cent. others might put the figure higher. while growth will probably slow down in the years ahead, it should remain well above the european average. the central bank estimates that a long - term growth pattern of the order of 4 - 5 per cent is within our capability, if the international environment remains benign. this will depend on a number of factors, not least continuing low inflation. the current national wage arrangements provide a solid basis for cost competitiveness and it is most important that these terms are not diluted. unemployment is below the european average. the progress on job creation in recent years is impressive and the outlook is good. in its quarterly report published in december the central bank forecasted an average inflation rate for this year of 2½ per cent, which is relatively low in absolute terms and is within the threshold for qualification for emu. the subsequent decline in the irish pound has increased the prospect of a somewhat higher figure. there are other factors such as asset price

nor can i outline a timepath. it is evident, however, that some reductions of significance are likely. in the meantime, irish interest rate policy will be influenced by the requirements of the domestic economy. the central bank will retain the discretion to adjust rates for as long as possible. i might also draw the attention of members to the impact on savings. in a lower interest rate regime some deposit rates must inevitably come down. the returns on call deposits in particular are already at very low levels. it would be unwise to assume that interest rates will remain permanently low once the euro area is established. as with the us dollar, successful management of the euro will require periodic interest rate adjustments to secure the objective of price stability. in the context of emu, the relationship with sterling is of obvious concern to us. we now know that the uk will not join emu for some time ahead. it would be better for us, if it joined at the outset. i cannot predict future movements of sterling relative to the euro. i would, however, point to the treaty requirements that all member states should treat exchange rate policy as a matter of common interest. this applies as much to the uk as to anybody else. the bank of england will participate in the general council of the european system of central banks and will be subject to the obligations that this imposes. i would further suggest that the decision last year to give operational independence to the bank of england is significant in this context. it is working to an inflation target and this arrangement should reduce the likelihood of large - scale fluctuations of sterling vis - a - vis the euro. it is vitally important that the credibility of the euro is established immediately. to achieve this the new currency must be supported by a solid economic background and political consensus. there is considerable speculation about the merits of a hard or a soft currency. the critical factor is that the currency be stable in terms of european prices so that its international role will be secure and that, in time, it will challenge the dominance of the us dollar. the external value of the euro will be largely determined by the monetary policy implemented by the european central bank and by developments in the foreign exchange markets for the major industrial currencies. supervision may i now turn to a different aspect of our activities. the central bank ’ s approach to supervision reflects european legal requirements and is in line with best international practice. the basic objectives of supervision of banks and building societies are to protect depositors and investors and to