Irish central bank hikes 2022 inflation forecast to 4.5%

DUBLIN (Reuters) – Ireland’s central bank on Wednesday sharply hiked its inflation forecast for 2022 to 4.5% from 2.9% three months ago and expects the rate to remain above 2% for the following two years with price growth spreading more widely across the economy.

Like in many euro zone economies, inflation in Ireland has rocketed in recent months and is at a 20-year high of 5.5%. The central bank said energy prices are expected to remain higher for longer during 2022 with supply chain issues and some labour shortages contributing to higher costs for businesses.

The Harmonised Index of Consumer Prices (HICP), which seeks to strip out the most volatile components, is forecast to peak in the first quarter, remain above 5% from April to June and fall materially in the second half of 2022, the bank said.

However it will still average 2.4% in 2023 and 2.1% in 2024, higher than previously forecast, mainly due to price growth in the services sector where modest increases are already evident. Wage growth is set to pick up to 5% in 2024 from 3.3% this year.

The risks to the inflation forecast are also judged to the upside, it added.

While its forecasts for economic growth were little changed from three months ago, the central bank sees a far more rapid reduction in unemployment that previously thought after an “exceptional” recovery in the jobs market following one of Europe’s toughest series of COVID-19 lockdowns.

The economy is now more open than at any time during the pandemic after the government surprisingly lifted almost all curbs last week.

The central bank estimates that unemployment will average 5.8% this year versus the 7.2% forecasted just last October, dropping to 5.3% in 2023 and a pre-pandemic level of 4.9% in 2024

It expects modified domestic demand, its preferred measure for the health of the economy which returned to its pre-pandemic level late last year, to increase by 7.1% this year, unchanged from the last update and by 5.2% and 4.8% the following two years, buoyed mainly by personal consumption.

Ireland’s public finances are also estimated to return to surplus in 2023, two years ahead of the government’s most recent expectations published late last year.

(Reporting by Padraic Halpin; Editing by Lisa Shumaker)