The Central Bank said today that while many people here are being stretched by the cost of living, households and businesses are proving resilient to inflationary shocks so far.
In its Financial Stability Review – published today – the Central Bank said that ten years of prudent lending is supporting resilience to rising interest rates.
Today’s FSR said that risks to the global economy remain elevated due to still high inflation and the necessary monetary policy response, a tightening of financial conditions and geopolitical fragmentation.
It added that global markets remain vulnerable to shocks, as seen in recent turbulence in the global banking sector.
Speaking at the publication of the Financial Stability Review today, the Governor of the Central Bank Gabriel Makhlouf said “inflation remains far too high”.
The Governor said that “a range of signals from across the globe tell us that more work is needed from monetary policy in the short run. Core inflation in particular has proved more stubborn than many would have predicted.”
The ECB’s Governing Council holds an interest rate setting meeting next week, when it is widely expected to increase rates by another quarter of a percentage point.
The Governor repeated his view today that interest rates will be increased at the ECB meeting next week. He also said “another further move in July is probable”.
When the ECB stops raising rates, he said he expects rates to remain where they are for some time.
“Once we’ve reached top of the ladder, we are likely to stay there for a while,” he said, adding that some market forecasts of rate cuts at the end of this year are “just speculation”.
The main decision contained in the Central Bank’s FSR today is to raise the Counter-Cyclical Buffer, a level of reserves banks must hold, from 1% to 1.5% from June 2024.
Despite this, the Governor said domestic banks in Ireland are “much better able to absorb adverse shocks than in the past”.
The CCyB rate represents an extra buffer for banks that varies depending on the economic outlook and the Central Bank has been gradually building the CCyB rate since June of last year.
Capital buffers provide resilience to the potential materialisation of future shocks and provide scope for their release so that banks can maintain the supply of lending when risks materialise.
“The existing capital headroom of the banking sector and its profitability outlook mean that the CCyB increase is not expected to have a material effect on credit conditions,” the Central Bank added.
The bank said last year that such a move was likely.
The Central Bank regards 1.5% as the “neutral rate” for CCyB, the bank’s Director of Financial Stability Mark Cassidy said today.
Domestically, the Central Bank Governor said today that the Irish economy continued to surprise with its resilience, and growth forecasts have improved.
“But that we must remain mindful of the range of adverse outcomes that may materialise. Rising interest rates have already had immediate effects in the commercial real estate market, and appear to be slowing the housing market in recent months,” he said.
He acknowledged that while many households and businesses are experiencing challenges with the cost of living, lower levels of indebtedness, household income growth and robust employment remain a key source of strength.
“Our assessment is that, if the economy continues to evolve in line with our expectations, we are likely to see only modest increases in financial stress among domestic borrowers, despite clear challenges for some groups of borrowers,” he added.
The Central Bank also said that the public finances continue to be in a position of strength but noted that the concentration of corporate tax receipts among a small number of large companies continues to necessitate prudent fiscal planning.
The Governor also said he believed the Code of Conduct on Mortgage Arrears is working and that borrowers who experience difficulties should contact their lender.
He also said the Central Bank is concentrating on ensuring that all lenders, both banks and non-banks, are complying with their obligations under the Code.
The Irish financial system is not as exposed to the current downturn in the commercial real estate market as it was in the past, Mr Makhlouf stated.
34% of Irish bank lending was to the commercial property sector in 2008 but today that exposure has fallen to 10%.
Today’s FSR also shows that prices in the Irish commercial property sector have fallen by 9.4% in the year to the end of March.
But Mr Makhlouf said the failure of banks on both sides of the Atlantic have provided another example of the speed with which risks can materialise.
Outlining how Irish banks are in a very different situation and that banking reforms introduced since 2008 have built resilience, the Governor said that while some borrowers will face difficulties, higher levels of bank profitability are likely to continue.
“Of course there are tail risks that we must continue to factor in and be ready to address. However, the banking system has ample headroom above regulatory requirements in both capital and liquidity, with very high levels of cash reserves. All of these support the resilience of the sector,” he stated.