Will ECB rate rise halt Irish business recovery?

What would the impact of an European Central Bank interest rise have on Irish business? Will it halt the country's chance of economic recovery?

The first thing to decide is which interest rate we're talking about.

When economists talk about the interest rate, they normally mean the rate central banks charge retail banks for funds. That's a useful measure of economic activity, since this rate feeds into the real economy—households, firms, the government—fairly quickly.

In the past, economists generally considered financial markets to be dominated by a single 'typical', risk-free rate of interest. There were many interest rates in practice, but they would all move with the dominant rate, so that, subtracting the various idiosyncratic risks associated with different types of financial instruments, they would tend in the long run to converge to a common underlying rate.

In turn, this rate would be brought, by competition, into equality with the marginal rate of return on real assets. All the greats of classical economics like Marshall, Wicksteed, Wicksell, Fisher and Pigou discussed 'the' rate of interest when setting out the general principles of economics. Modern textbooks ape the classics, so today we learn about only one interest rate.

For Ireland though there are different interest rates to watch out for.

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