Central Bank’s Makhlouf Doesn’t Rule Out Another Interest Rate Hike

The Central Bank’s Financial Stability Review, released today, suggests that the full impact of higher interest rates has yet to be realized in the economy. Despite this, the Review maintains the existing mortgage lending rules. During a press conference, the Governor of the Central Bank expressed concerns about inflation in Ireland exceeding the euro area average and did not rule out the possibility of another interest rate increase.

While mortgage lending limits were relaxed by the Central Bank last year, the Financial Stability Review for this year keeps them unchanged, with no anticipation of regular rule changes. Any alterations, the report states, would primarily be influenced by “slower-moving,” “structural” forces.

The review underscores the 20% decline in commercial property prices since 2020 as a risk to the financial system. However, it notes that Irish banks are less exposed to commercial property lending than during the financial crisis.

Governor Gabriel Makhlouf expressed concern about Ireland’s inflation rate surpassing the euro area average. Although he suggested that interest rates were likely nearing their peak, he did not rule out the possibility of another rate hike. He anticipates that inflation across the euro area will return to the target rate of 2% by 2026 or earlier.

The review found that Irish savers are slower than their European counterparts to shift from overnight deposits to higher-yielding term deposit accounts. The Central Bank has also today decided to maintain its Counter Cyclical Capital Buffer (CCyB) at 1.5%, an extra layer of reserves banks must hold against financial shocks.

Additionally, the review increased the level of reserves required for Permanent TSB Group while lowering the requirement for Ulster Bank following its phased departure from the Irish market. Permanent TSB is now designated as an “Other Systemically Important Institution” in Ireland due to recent structural changes in the Irish banking market.

The Central Bank has also launched a public consultation on regulatory changes for Irish registered sterling-denominated Liability-Driven Investment funds.

Governor Makhlouf, speaking on the News at One, acknowledged increased financial stability risks and observed changes in people’s spending habits in anticipation of potential developments. He highlighted the impact of Budget 2024 measures on the economy, emphasizing the need for humility in the face of uncertainties. Regarding climate change, Makhlouf stressed the growing focus on addressing the protection gap and insurance reform, expressing support for government initiatives in flood defenses and insurance reform. He emphasized the Central Bank’s expectations that insurance firms prioritize customer interests in their decision-making processes.