Ongoing flow of strong economic data is helping Ireland to move beyond the legacy of the crisis – Governor Philip R. Lane

• Current economic prospects are robust, with both domestic demand and the external environment supporting growth
• However, tail risks are rising such that prudence in both macro prudential policy and fiscal policy is essential in order to build resilience 
• The Central Bank is committed to resolution of legacy mortgage problems (the high stock of non-performing loans; the completion of the tracker mortgage examination)

Speaking at the Institute for International and European Affairs (IIEA) in Dublin, Governor of the Central Bank of Ireland, Philip R. Lane, discussed the macro-financial environment in Ireland. He said that the Irish economy continues to perform well, based on a broad recovery in domestic demand and a strong external environment. However, at the same time, tail risks are rising, in view of global concerns about the international trading and taxation systems. He said, “unexpected events can trigger upside or downside revisions to our forecasts, especially in relation to the longer-term path for the economy. It follows that public and private decision makers should ensure that choices are robust to unanticipated outcomes, rather than putting an excessive and unrealistic reliance on our central projections.”

Governor Lane discussed the importance of having an appropriate fiscal strategy for Ireland. He said, “the accumulation of good news about the trend path for the Irish economy calls for the political system to make proportionate decisions about the paths for public spending and taxation, given the extra fiscal capacity to meet social preferences for increased provision of public services, increased transfers, expanded public investment or an adjustment in the tax burden. In the other direction, the downside risks (together with the still-high level of public debt) call for a prudent approach that recognises the importance of building fiscal buffers during good times in order to enable more vigorous counter-cyclical fiscal interventions in the event of a future economic downturn.”

He added, “It is important to emphasise that fiscal prudence can be fully reconciled with ambitious fiscal plans. However, it is necessary to recognise the genuine trade offs that exist, especially if the labour market returns to full employment.”

In line with the Central Bank’s financial stability, prudential and consumer protection mandates, housing market developments are monitored closely. Governor Lane noted that the most recent Central Bank analysis confirms that aggregate credit conditions remain subdued, even if the pace of new mortgage lending has picked up.

“Our analysis that house prices have moved broadly in line with fundamentals is fully consistent with a material risk of a reversal in house prices: buying a house is certainly not a one-way bet. In particular, international and domestic factors may trigger fundamentals-driven corrections in the housing market”, he said.

He also discussed the importance of the work undertaken in recent years to address mortgage arrears and reduce the level of non-performing loans (NPLs) in Ireland. He said that banks can resolve NPLs through multiple channels, including workouts, restructures (including accounting write-offs), foreclosures and sales. In relation to the evolution of mortgage arrears in Ireland, he said it is clear that the system has been much more effective in achieving sustainable solutions in relation to early-stage arrears cases than in addressing long-term arrears. Whilst sustainable solutions can be put in place quickly for engaged borrowers that are in early arrears, the resolution of long-term arrears has been a particular challenge.

He concluded, “it is clear that NPLs have been reduced through restructuring and re-engagement between lender and borrower, with both banks and non-banks pursuing restructuring where possible. Importantly, the management of arrears has been within a policy and regulatory framework that provides robust protections for households. Given NPLs cause such considerable distress to borrowers and negatively affect their ability to contribute to the economy, recent reforms of the insolvency framework are important to give borrowers a second chance.”