Ireland Central Bank Statement

Author: | Published: 19 Oct 2018
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The Irish economy has been in a strong growth phase in recent years, supported by both domestic and external demand. Unemployment is forecast to fall below 5% in 2019, far below its post-crisis peak above 15%. Some sectors of the economy – especially construction – have yet to emerge fully from the boom-bust cycle, such that the post-crisis recovery process is not yet complete.

While near-term growth prospects look quite positive, there are several clear downside risks. The Irish economy faces potential external challenges including shifts in international financial conditions, protectionist-motivated changes to international trading arrangements and shifts in international tax policies. As a small, highly-open economy, Ireland feels the impact of any related adverse events more keenly than others. Of course, Brexit has wide-ranging implications, given the close ties between the Irish and UK economies: the net impact will depend on the final outcome of the EU-UK negotiations.

On the domestic front, the projections for the labour market indicate that the economy is heading towards full employment. As the Irish economy moves closer to capacity limits, a prudent approach to fiscal policy is desirable, with the running of surpluses during good times enabling a counter-cyclical fiscal stance during future downturns.

While there has been considerable deleveraging, households remain relatively highly indebted with Irish banks still tackling the elevated stock of non-performing loans. A considerable proportion of the latter comprise mortgage arrears cases of long duration. The Irish retail banking system is profitable and well capitalised, with loan volumes projected to expand in line with the recovery in the economy.

As the designated national authority for macroprudential policy in Ireland, the Central Bank has implemented a number of macroprudential measures in recent years, with the goal of increasing the overall resilience of the financial sector. Borrower-based measures, including loan-to-value and loan-to-income ceilings on mortgages, increase the resilience of the banking and household sectors to adverse developments in the property market and protect against credit-house price spirals emerging.

In July 2018, the Central Bank announced a change to the counter cyclical capital buffer (CCyB), raising it from 0% to 1% (effective July 2019). This measure increases minimum capital requirements during the current economic growth phase and helps protect banks against possible losses associated with the build-up of cyclical systemic risk. Furthermore, a number of systemically important institutions will be required to hold additional capital (termed the O-SII buffer) from 2019 onwards.