Governor Gabriel Makhlouf expressed his concern about certain proposals being considered by politicians as they may contradict the European Central Bank (ECB) policies aimed at curbing inflation.
“Some of the proposals out there look as if they are deliberately trying to counteract monetary policy action,” he said, explaining that the ECB aims to reduce demand in the economy by raising interest rates.
“If the public as a whole conclude that every time interest rates go up, governments will counteract them, then that just gets you into a world where monetary policy needs to do more.
“When governments make budget decisions, they need to think very carefully about the design and what is the impact they’re trying to have. Will it actually deliver, and what will its unintended consequences be?”
Sinn Féin has called for temporary, targeted mortgage interest relief for those on tracker mortgages who have absorbed the full weight of the ECB’s 3.75% interest rate hike since July. Although the Government initially rejected the demand, Taoiseach Leo Varadkar relented last month and said relief for mortgage borrowers would be considered as part of Budget 2024.
Mr Makhlouf shared his thoughts at the unveiling of the Central Bank’s first Financial Stability Review for 2023. The report assessed the risks facing the Irish economy and the financial system, and warned that the global economy remained vulnerable to high inflation and constrained financial conditions.
The report also highlighted that the Irish economy had shown resilience to the pressures. The Central Bank said low borrowing levels and record high savings in the economy meant recent interest rate hikes had limited financial stress impact.
However, the bank warned of the persistent inflation rate along with a slowdown that could expose vulnerabilities, leading to further credit risk and arrears. Director of Financial Stability Mark Cassidy said the Irish banking system had the capacity to absorb potential shocks due to improved profits, high capital levels and ample cash reserves.
Nonetheless, the Central Bank is making banks boost their emergency reserves over the next year to manage any potential shocks that may arise. Mr Makhlouf also echoed recent warnings from the Irish Fiscal Advisory Council about the Government’s reliance on corporate tax receipts from a small number of large companies and highlighted that Ireland was in a position of fiscal strength but should exercise prudent fiscal planning, the report said.
