World Economy

Irish CB Warns of Systemic Risk to Growth

Property values are growing by 13% annually.Property values are growing by 13% annually.

The Irish Central Bank has highlighted what it describes as a “build up” of systemic risk in the country’s economy, fuelled by rapid economic growth, persistently strong house prices and volatility abroad, including Brexit.

At its latest macro-prudential meeting in March, central bank officials, including Governor Philip Lane, discussed the biggest risk factors facing the Irish economy. In particular, they highlighted “the cyclical strength of the economy” and the potential for overheating as it converges on full employment, which is expected to occur next year, RTE reported.

They also noted “the persistence of real estate price growth”, with property values now growing by 13% annually. The “relative volatility” of the macro-financial environment, including Brexit and threats to global trade, was also discussed.

“While credit growth, although strengthening, is unlikely to be considered excessive at this juncture, it was highlighted that broader cyclical dynamics are suggestive of the build-up of cyclical systemic risks,” the minutes of the meeting state.

“In light of these broader dynamics the committee will consider whether the introduction of a macro-prudential policy instrument targeting cyclical risks may be an important signal to the market of such risks,” they said.

The central bank decided in March to leave its control on bank credit, known as the countercyclical capital buffer,  or CCyB, unchanged at 0% for the second quarter of 2018.

The CCyB rate is reviewed by the bank on a quarterly basis, and can be increased up to 2.5% if the central bank deems lending to be excessive.

Meanwhile, speaking at an IMF event in Washington over the weekend, Lane said Ireland was in a better position to withstand a recession this time around because of the higher levels of equity being used to finance investments.

He said while there had been a pickup in real estate activity in Dublin, most of it was equity financed, often by global equity.

In its latest quarterly bulletin the central bank said Irish workers could expect wages to grow by up to 7% over the next two years, twice the current eurozone rate.

Mark Cassidy, the central bank’s director of economics and statistics, said wage growth of this magnitude was broadly sustainable given growth elsewhere in the economy.

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