World Economy

Irish Economy Vulnerable to Interest Rates

Irish Economy Vulnerable to Interest RatesIrish Economy Vulnerable to Interest Rates

As part of its draft stability program update, published this week, the Department of Finance included a “sensitivity analysis” to model the effect of changes in world output and interest rates on the Irish economy, a sort of a macro stress-testing exercise, Irish News Agency reported. It found the economy here is considerably more sensitive to changes in interest rates than to changes in global output. What’s worrying about this finding is that a period of higher interest rates is guaranteed while a contraction in global output, while probable, is not a certainty. The department’s analysis found that a 1% decline in world output would lower Irish gross domestic product by 1% and push up unemployment by 0.5% over five years relative to a baseline path for the economy. However, a 1% hike in the European Central Bank’s main lending rate would have nearly twice the impact on Irish GDP, amounting to a 1.8% drag over five years.


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