Central Bank publishes research and information on ongoing work to ensure consumers are protected in a changing economic landscape

• The necessary monetary policy actions to bring inflation back to target are transmitting through the economy via credit markets. 

• The household sector, as a whole, entered this period with greater resilience than in the past, but some groups of borrowers are particularly exposed to rising interest rates.

• The Central Bank’s ongoing work is scrutinising how the regulatory framework is delivering for consumers as we see rate increases begin to impact. 

Last year, inflation in the Euro Area, including in Ireland, surged to its highest level in decades. The rising cost of living poses challenges to households and businesses across the country. In light of building underlying inflationary pressures, the European Central Bank has increased interest rates rapidly, to ensure a timely return of inflation to its 2% medium-term target. 

In this environment, assessing developments in credit markets is a critical component of the Central Bank’s work to maintain monetary and financial stability, while ensuring that the financial system operates in the best interests of both consumers and the wider economy. 

Today, the Central Bank of Ireland is publishing new research that sheds light on the resilience of households to these developments and, more broadly, on how credit markets have been evolving in this rapidly evolving environment. The Central Bank is also publishing a note on the ongoing  work (PDF 554.47KB) to ensure regulated firms meet the expectations set in its November 2022 Dear CEO Letter (PDF 102.21KB) on protecting consumers in a changing economic landscape, relating to mortgages secured on a borrower’s primary residence.

Deputy Governor, Monetary and Financial Stability Vasileios Madouros said: “The global economy has experienced an abrupt adjustment over the past 18 months. Following a prolonged period of subdued inflation and very low interest rates, inflationary pressures have built up globally and central banks have raised interest rates in response. 

“This rapid adjustment in the economic environment cuts across the entirety of our mandate. Analysing developments in credit matters for understanding how rising interest rates are affecting the economy; assessing the resilience of the household sector as a whole; and, within that, identifying groups of borrowers that may be more vulnerable to distress. 

“Among other insights, the research published today underlines the heterogeneous impact of high inflation and rising interest rates. The household sector, in aggregate, is in a more resilient position than in the past, but a group of borrowers is more vulnerable to these shocks. Our analysis also points to some increase in demand for short-term credit among individuals and companies in recent months, amid the rising cost of living.”

Deputy Governor Consumer and Investor Protection Derville Rowland said: “We are acutely aware of the challenges and pressures borrowers are facing with the rising cost of living and rising interest rates. 

“The regulatory framework should support consumers looking to switch mortgage or facing difficulties in meeting their repayments, and these measures should operate effectively. Key to this is early engagement by firms so they can respond to the needs of their customers in a timely way.  

“We at the Central Bank will continue to ensure that firms meet their responsibilities in this regard. We have engaged intensively with firms since last year on the operation of specific aspects of the framework including arrears and switching, with a particular focus on how consumers that need, or may need support, can be helped within the regulatory framework we supervise.

“Firms have responded with additional supports for borrowers and increased operational capacity. This has included proactive contact with vulnerable borrowers including those at greatest risk of default, and continued provision of supports, including alternative repayment arrangements, to borrowers at risk of arrears. 

“While those actions are welcome more needs to be done. The next phase of our work will include a broader industry engagement to discuss areas where consumers could be better supported through greater coordination amongst participants and where the information or options available to affected consumers could be enhanced.”

Research

Our Financial Stability Note - “The interest rate exposure of mortgaged Irish households” (PDF 614.49KB), authored by David Byrne, Fergal McCann, and Edward Gaffney, finds that:

• The impact of interest rate changes varies widely across households. Due to high levels of mortgage fixation, up to half of all mortgage holders at retail banks are likely to have experienced no increase in repayments by the end of 2023 and around 40% will be insulated from higher interest rates by the end of 2024. 
• Tracker mortgage customers and interest-only customers are among the most exposed to repayment shocks. This most-exposed group also tends to have substantially larger mortgage balances and longer terms remaining on their loan, than less exposed variable rate customers.
• The most exposed customers are likely to have taken out their loans between 2004 and 2008, when credit conditions in the Irish market were at their loosest. This suggests a correlation between exposure to the current repayment shock, and measures of vulnerability stemming from the financial crisis.

"Household resilience to expenditure and debt service channels under current inflationary conditions" (PDF 704.63KB) is another Financial Stability Note, authored by Tamanna Adhikari and Fang Yao.  Findings include:

• Under a baseline scenario to the end of this year, mortgage distress rates are modelled to increase from 8.3% to 9.6%. In this scenario, the analysis suggests that the debt-servicing channel is more important than the expenditure channel in explaining the increase in distress amongst mortgaged households. 
• The distress rate is modelled to increase to 12.7% under the most severe adverse scenario modelled, which incorporates higher inflation, higher interest rates and a significant increase in unemployment.
• Lower-income mortgage borrowers are most exposed to the combined shocks currently being experienced. In addition, borrowers with a tracker loan show higher distress rates than other interest rate types.

A Behind the Data publication, “Credit demand and lender activity to February 2023: What can high-frequency lender credit enquiries tell us?” by Martina Sherman and Maria Woods finds that:

• Lender credit enquiries data show increased demand for short-term credit among individuals and companies over 2022 and to end-February 2023, which can be linked to rising costs of living, rate increases and an evolving retail lending market. 
• There has been a reduction in enquiries for mortgage lending by non-banks; likely as a result of non-banks’ less competitive pricing.
• However, the sector remains an important source of funding for companies, particularly for asset finance. 

The “Investigating recent growth in bank lending to non-financial corporations in Ireland” Behind the Data paper, by Jack Dempsey and Simone Saupe looks at bank lending to Irish non-financial corporations and its findings include:

• Since September 2021, bank lending to Irish non-financial corporations (NFCs) experienced considerable growth. 
• This upward trend was mainly driven by revolving loans drawn down by large enterprises, predominantly in the manufacturing and property-related sectors. 
• Other large enterprises, mainly in the utilities, transport and storage sectors recorded considerable increases in net borrowings. In contrast to this, for large firms in the hotel and restaurant sector, repayments exceeded new lending on annual terms.

The work is organised in phases with a view to ensuring that mortgage borrowers across the system are protected to the fullest extent of the regulatory framework for which the Central Bank is responsible. It includes a focus on borrowers on higher mortgage rates and the capacity for borrowers to switch mortgage product or provider.

Phase 1 of the work, which is now complete, was based on to ensuring that:

• Firms are operationally ready to identify and support borrowers who may face challenges meeting their repayments;
• Where borrowers look to switch there is no discrimination based on where they have their current loan (including in the case of borrowers with non-lending firms); and
• Interest rate increases are in line with loan terms and conditions, published variable rate policy statements and the regulatory framework for which the Central Bank is responsible.