Irish central bank governor departs with overheating warning

DUBLIN: Ireland's departing central bank chief warned the government on Wednesday that it risks stoking overheating pressures that could do lasting damage to the economy if it does move towards running "significant" budget surpluses.

Citing data last week that showed unemployment in Europe's fastest growing economy was far lower than thought at 4.6%, Philip Lane used his final outing before taking over as European Central Bank chief economist to renew his call for greater fiscal prudence.

The central bank has been urging the government to do more to cool the economy since 2017 and has been disappointed that the budget only returned to balance for the first time in a decade last year, with small surpluses forecast for the next two years.

"We are convinced that this is not a small issue. People should not be in denial, there is a limit to asking what the Irish economy can deliver," Lane, who joins the ECB's executive council on a full-time basis next week, told a news conference.

"Our advice to the government to run bigger surpluses is partly to do with fiscal sustainability but actually the bigger issue right now is not to demand too much from the Irish economy."

Finance Minister Paschal Donohoe, who last week said Ireland was now close to full employment, responded that Lane's comments showed why it was so important the government delivered its targeted surplus of 0.2 percent of GDP this year.

Lane, who will be replaced from September by New Zealand treasury chief Gabriel Makhlouf, said policymakers would have to keep a very close eye on wages which were growing strongly at 3.4% year-on-year and more so in "some very hot sectors."

It was hard to say that there is overheating taking place unless Ireland's "remarkable" employment situation leads to significant wage increases, he said.

"But this is something to be really concerned about, that if we have overheating, the damage could be quite long-lasting because it's easy to raise wages, it's very difficult to cut wages," Lane said.

"Everyone is aware of this, what I say is no different I'm pretty sure to what the analysis would be in the department of finance, it's really translating that into an outcome because you need the political consensus to prioritise financial and macro stability."

Lane added that Ireland and the euro zone had been ready for a no-deal Brexit in March and remained ready in the event of a chaotic British departure from the European Union, the chance of which he said was rising.