Economy remains resilient, but Ireland’s small open economy is exposed to heightened geopolitical risks – Central Bank of Ireland’s Financial Stability Review
04 December 2024
Press Release
The Irish economy continues to grow, as inflation falls, but Ireland remains exposed to global developments amid rising international trade tensions, the Financial Stability Review published today (4 December 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 continued to make progress to reduce inflation towards central banks’ targets and this progress has been achieved without significant instability, as the global financial system remains resilient.
However, while global economic growth has been stable, some indicators of activity have weakened, particularly in Europe.
In his opening remarks at today’s press conference, Governor Gabriel Makhlouf said key financial stability risks centre around uncertainty and rising geopolitical tensions, which raise the prospect of lower trade and economic growth.
Governor Makhlouf said: “A protectionist and fragmented world has negative implications for economic activity domestically and internationally, as well as for the resilience of households, firms and the financial sector.
“Financial markets have experienced periods of volatility since the last Review, albeit these have been short-lived. This highlights underlying fragility in market sentiment, and the potential for market disruption if expectations change quickly or if there are further escalations in the geopolitical environment. Compressed risk pricing in corporate debt markets and stretched equity valuations in some sectors leaves markets open to a swift repricing. As we have been warning for a number of years now, high levels of leverage in certain parts of the non-bank sector, and increasing interconnectedness between non-banks and global banks, could amplify any shock to financial markets.
“Global and Irish Commercial Real Estate (CRE) markets continue to adjust, and prices are showing some signs of stabilisation. However, there is still uncertainty over the full scale of the downturn in these markets. And in Ireland, vacancy rates in the Dublin office market remain high and investment activity is subdued. The Central Bank’s judgement remains that the domestic banking system is resilient to this downturn. In residential housing, an ongoing deficit in supply continues to drive prices domestically, and around 52,000 new homes per annum could be needed to meet demand. Despite these imbalances, there are no signs of excessive risk taking in mortgage credit, while aggregate mortgage credit growth remains moderate.
“More broadly, the Irish economy is growing strongly and modified domestic demand is expected to grow in 2024 and 2025 at a faster pace than at the time of the last Review. However as international investment and multinational enterprises (MNEs) are central to the domestic economic model, driving a significant share of growth, public finances and employment, Ireland is particularly exposed to global developments at a time of increased geopolitical and geoeconomic risk. Moreover, with an economy performing at or above capacity, expansionary fiscal policy risks aggravating domestic pressures.
“Irish households and businesses have been supported by a growing economy, but are also exposed to global shocks. Households have weathered the period of higher interest rates, with the amount of income spent on debt repayments remaining stable. This follows a substantial decline in interest expenses in the decade after the global financial crisis. However, a shock to international trade could have knock-on effects for the labour market here, as well as the performance of domestic firms. Irish small and medium-sized enterprises (SMEs) have shown resilience, but there are pockets of risk, for example with insolvencies rising in the accommodation/food and other services sectors although we have continued to observe employment growth in these sectors.
Governor Makhlouf said that domestic bank profitability has likely reached its cyclical peak and the sector is resilient and well placed to withstand any softening in profits. 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.
On the Central Bank’s mortgage measures, the refreshed framework and current calibration limits has applied since 1 January 2023. Evidence suggests they continue to meet their aim of ensuring sustainable lending standards in the mortgage market.
Governor Makhlouf said the Central Bank is monitoring the implementation of measures already introduced for the non-bank sector. He added the Central Bank continues to work with international partners to support the development of an overarching macroprudential framework for investment funds. “We recently published our response (PDF 699.99KB) to the European Commission’s targeted consultation on macroprudential policies for NBFI, in addition to contributing to a Eurosystem response (PDF 714.35KB),” said Governor Makhlouf.
Further information
Martin Grant: [email protected] / + 353 86 078 7868
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Notes to Editor
- 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.