Strong economy supports resilience of households and businesses, but risks remain in an uncertain world – Financial Stability Review

The strength of the Irish economy and the gradual easing of inflation continue to support the resilience of households and businesses, but risks remain amid rising geopolitical tensions, the Financial Stability Review published today (11 June 2024) by the Central Bank of Ireland shows.

The report is one of the flagship publications from the Central Bank and is published twice a year. It outlines the Central Bank’s assessment of the main risks facing the financial system, the resilience of the system to those risks, and policy actions to safeguard stability.

It shows the global economy has been more resilient to higher interest rates than many had expected and that some of the most acute risks have eased somewhat since the previous report last November. However, rising geopolitical tensions mean further shocks are possible, creating a particular concern for an open, highly-globalised economy like Ireland.

In his opening remarks at today’s press conference, Governor Gabriel Makhlouf said the continued fall in inflation, a strong labour market and the sustained strength of the economy is positive news. However, the Governor said risks remain, especially in an uncertain geopolitical context.

The review shows the global commercial real estate (CRE) market has suffered a sharp downturn. Office and retail sectors are experiencing reduced demand after the pandemic and a sharp rise in interest rates. Governor Makhlouf said: “Ireland is not immune from this shock and domestic capital values have fallen by over 25 per cent since 2019, while the Dublin office market is experiencing one of the largest increases in vacancy rates in Europe. Despite the size of the downturn, the impact on the Irish financial system has been contained to date, with diversification of investors and financing sources, coupled with resilience in our core domestic banking sector, helping the financial system to absorb – rather than amplify – the shock.” A special feature (PDF 796.22KB) accompanying the review provides a detailed assessment of Irish CRE.

Commenting on the mortgage market, Governor Makhlouf said the Central Bank’s refresh of its mortgage measures framework has been in effect for over a full year. These measures are a permanent feature of the market and aim to ensure sustainable lending standards. He added: “Regularly monitoring and assessing the role the measures are playing within the mortgage and housing markets remains a priority for the Central Bank.  Our overarching view continues to be that structural forces such as the imbalance between supply and demand are the main driver of house price growth.”  

On the resilience of mortgage borrowers, Governor Makhlouf added: “Despite the rapid change in interest rates, 29 per cent of borrowers saw no change in their scheduled repayment between mid-2022 and December 2023 due to fixed rate borrowing, while another 12 per cent in fact saw a decrease, due to proactive switching behaviour at the beginning of the period of higher interest rates.  By the end of next year, an additional 16 per cent of mortgages will roll off their fixed term, while a quarter of mortgages will be insulated from interest rate increases until 2026 or later. This gradual maturing of fixed rate mortgages, along with incomplete and uneven pass-through of monetary policy changes by lenders, have all supported households in weathering this period of high interest rates.  Income and employment growth has acted as the first line of defence for household resilience, while our mortgage measures have also supported the gradual improvement in the health of household balance sheets for close to a decade now.”

He said the presence of multinationals in Ireland has brought many benefits, but we must remain mindful that, given the concentration of employment and tax receipts among a small number of firms, an unexpected shock could have an oversized impact. Governor Makhlouf added: “Capacity constraints are also testing the Irish economy, and maintaining an appropriate fiscal policy while the economy is at full employment will continue to be key to long-term macroeconomic stability in Ireland.”

While businesses have experienced an increase in costs, the domestic economy has supported small and medium-sized enterprises (SMEs). “There are some signs of distress, however, with insolvencies increasing in certain sectors, albeit from very low levels, and we must continue to monitor closely for any delayed impact of recent shocks,” the Governor said.   

The banking sector has experienced increased profits from higher interest rates, “but profits are expected to moderate this year if monetary policy develops as expected, while funding costs may increase through competition for deposits, and an increase in loan defaults would further weigh on the sector,” said Makhlouf.

He continued that the Countercyclical Capital Buffer (CcyB) – a tool used by the Central Bank that requires banks to set aside financial resources to act as a shock absorber – will be maintained at 1.5 per cent. “If a shock were to hit the economy, its release would loosen capital constraints, enabling the banking system to absorb losses and continue lending to the economy, preventing the type of credit crunch dynamic we have seen during previous crises,” the Governor said.

Governor Makhlouf also said strengthening the resilience of non-bank financial intermediation remains a priority for the Central Bank, and work is continuing with international partners to develop a macroprudential framework. He welcomed the feedback received to the Central Bank’s Discussion Paper on the issue and the perspectives shared by stakeholders at the international conference hosted by the Central Bank last month. A feedback statement will be published later this summer. He added that recent measures, announced in coordination with Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF), for Irish-authorised GBP-denominated Liability-Driven Investment funds, will increase resilience.

The Governor said the Central Bank will continue to closely monitor risks and adopt appropriate policy responses to ensure our economy and financial system remains resilient.

ENDS

Further information

Martin Grant: [email protected] / + 353 86 078 7868

Media Relations: [email protected]

Notes to Editor

• The Governor’s full opening remarks can be read here. 
• Financial Stability Review, June 2024 report can be viewed here (PDF 1.02MB). 
• To support the FSR, today the Central Bank also published:
  • Special Feature - Commercial Real Estate: A Macro-Financial Assessment (PDF 796.22KB)
  • Financial Stability Note: Estimating the total value of Ireland’s commercial property stock (PDF 584.34KB)
  • Financial Stability Note: The financial resilience of Irish CRE borrowers (PDF 467.52KB)
• The Countercyclical Capital Buffer (CcyB) is a time varying capital requirement, which applies to banks and investment firms. It aims to promote a sustainable provision of credit to the economy by making the banking system more resilient and less pro-cyclical.  The Central Bank is the designated authority for setting the CCyB rate in Ireland and as such sets the rate for Irish exposures on a quarterly basis, following consultation with the European Central Bank. A positive CCyB rate is generally subject to a phase-in period whereby it would take effect 12-months after announcement.  Further information is available on the Central Bank’s website.