Post-pandemic the road to recovery will be bumpy, according to the Central Bank’s first Financial Stability Review for 2021.

While the expansion of vaccination programmes has reduced downside risks to the macro-financial outlook, the full impact of the Covid-19 shock will become apparent only as government supports start to unwind, says the monetary authority.

Governor Gabriel Makhlouf (pictured) said: “Overall, economic and financial conditions in Ireland have improved over the last six months. The recovery may be bumpy and uneven, as some sectors in Ireland thrive while others continue to struggle with the effects of the restrictions. The viability of some businesses will be tested by the necessary tapering of government supports.”

Vulnerabilities in global financial markets have been building, says the review, amid higher levels of sovereign and corporate indebtedness. Looking beyond the pandemic, structural risks remain, including those stemming from changes in the banking sector, international tax changes, and climate change.

Steady As She Goes

Nonetheless, the bank does not intend any radical change in its overall macro-prudential stance, which aims to enable the banking system to maintain the supply of credit to households and businesses. There will be no change in the Countercyclical Capital Buffer interest rate of 0%, for example, nor any phase-in of the Systemic Risk Buffer this year.

In Association with

The review also provides the first ‘deep dive’ evaluation of the Central Bank’s mortgage measures framework, introduced almost seven years ago.

Makhlouf commented: “The role of the mortgage measures in guarding against the over-indebtedness of households and protecting financial stability is clear. However, as a permanent feature, it is important that we not only maintain the good practice of regularly reviewing the calibration of policy but also consider the overarching framework. 

“It is now approaching seven years since the introduction of the measures and a review of the framework will allow us to consider the overarching approach to our toolkit and strategy to ensure they continue to remain fit for purpose, in view of the constant evolution of our financial system and economy.”

The mortgage measures were introduced in February 2015 and set limits on the size of mortgages that consumers can borrow through the use of loan-to-value (LTV) and loan-to-income (LTI) limits. The measures are reviewed annually.

The Review will be published here.