The full effect of higher interest rates has yet to feed through the economy, according to the Central Bank’s Financial Stability Review published today.
The Review has left mortgage lending rules unchanged.
Speaking at a press conference, the Governor of the Central Bank said he was concerned inflation was higher in Ireland than in the rest of the euro area and that he would not rule out another interest rate increase.
Mortgage lending limits were loosened last year by the Central Bank. But in this year’s Financial Stability Review, the Central Bank has not only left them unchanged but says it does not foresee regular changes to the rules.
It says any changes would largely be driven by what it describes as “slower-moving”, “structural” forces.
Today’s Review highlights the 20% fall in commercial property prices since 2020 as one of the risks facing the financial system. However, it points out that Irish banks are much less exposed to commercial property lending than they were during the financial crisis.
On inflation, Governor Gabriel Makhlouf said he was concerned inflation in Ireland is higher than the euro area average.
The Governor said while rates were probably close to their peak, he would not rule out another rate rise. He went on to say he expects inflation across the euro area to be back to its target rate of 2% by 2026 or before.
On deposits, the Review finds that Irish savers are much slower than their European neighbours to switch from overnight deposits to higher yielding term deposit accounts.
The Central Bank has also today decided to maintain its Counter Cyclical Capital Buffer (CCyB) at 1.5%. This is an extra layer of reserves banks must keep on hold to guard against financial shocks.
Its latest review also increased the level of reserves that PTSB will be required to hold while the level imposed on Ulster Bank will be lowered following its phased departure from the Irish market.
The Central Bank said that Permanent TSB Group is now to be identified as an “Other Systemically Important Institution” in Ireland.
These are institutions which are systemically important to the domestic economy or to the economy of the EU.
Permanent TSB said its designation reflects the systemic importance of the bank following the recent structural changes in the Irish banking market after Ulster Bank and KBC Bank Ireland’s departure from the Iirish market.
The Central Bank has also launched a public consultation on changes to the way Irish registered sterling denominated Liability-Driven Investment (LDI) funds are regulated.
Speaking on the News at One today, Central Bank Governor Gabriel Makhlouf said that financial stability risks have increased and people were adjusting their spending habits in anticipation of what may be coming.
The Governor said that on the margains, Budget 2024 measures were having an impact.
“Inflation harms everybody in society and the vulnerable the most. We’ve had to raise interest rates and it is working, inflation is coming down, it hasn’t yet but it will have that impact,” he said.
He added that we live in a very uncertain world, and have seen things we didn’t expect to see and are now seeing geopolitical tensions, a fragmentation of the global economy as well as extreme weather events that are all having an impact on the economy.
Ireland needs to be humble, as the economy is much more resilient than it was ten or so years ago, but there are risks out that there that can not always be predicted, he stated.
On climate change, Mr Makhlouf said that the frequency and severity of these extreme weather events means the issue is being brought more into an immediate focus.
He said that there is a recognition globally that there is a growing protection gap where people do not have insurance cover.
“It’s an area of increasing focus for us. The Central Bank is prohibited by law from requiring any insurance company to provide cover, but we’re certainly very supportive of how the Government is looking to address this whether it’s flood defences or insurance reform,” he said.
He said that there were expectations of what insurance firms should do according to the Central Bank.
“They should be treating customers well by providing information and explanation and making it clear what’s happening. We expect firms to have their customers’ interests in full view when they are making decisions,” he added.