Central Bank asks for budgetary restraint is needed

The Central Bank has warned that the economy remains vulnerable to adverse shocks and said further financial consolidation will be needed to meet medium-term budgetary objectives.

Speaking yesterday at the publication of its latest quarterly economic outlook, Central Bank chief economist, Gabriel Fagan said that Ireland’s debt levels remain very high by international standards and that the economy would still be vulnerable to an adverse economic shock.

He said there is a need to reduce debt to lower and safer levels and further consolidation will be needed in the next few years. Mr Fagan further commented that this year’s target of achieving a budget deficit of 2.7% of GDP is still above the medium-term objective.

However, he declined to give a Central Bank line on what kind of adjustment might be needed to further strengthen Ireland’s debt levels.

The IMF last week suggested an extra 0.5% annual reduction in Ireland’s debt-to-GDP ratio over the next three years. This would call for an adjustment of €1bn in each of the next three budgets, but Mr Fagan declined to share a view on this yesterday.

In its latest economic bulletin, the Central Bank accepts that many of the legacy issues from the economic crisis have been overcome, but said the challenge remains to ensure that the emerging economic growth “transitions” into a sustainable return to steady growth and increasing employment.

“To achieve this outcome, policy needs to focus on reducing remaining vulnerabilities and strengthening resilience in order to minimise future risks to economic, fiscal and financial stability,” it said.

The Government has been lobbying for a green light to increase public expenditure next year, support for which came earlier this week from the Irish Fiscal Advisory Council which advocated a limited departure from European spending curbs next year. The IMF has also backed Ireland in its efforts to gain some flexibility around EU spending rules. The Central Bank yesterday said fiscal policy was purely a matter for Government.

Mr Fagan did, however, counter Finance Minister Michael Noonan’s comments about wondering if the Central Bank could try and pressurise banks to lower variable mortgage rates, by saying the bank has no powers to do so and could deter new market entrants if it did.

He said rate levels largely reflect a lack of competition in the lending marketplace. Mr Fagan also said it was too early to know what effect the Central Bank’s new mortgage lending restrictions have had on the market, or if they had any effect on the recent second consecutive monthly fall in house prices. The bank is working on a framework to assess the effect of its new lending rules, which will encompass things like house price changes, new loan output and new housebuilding levels. One of the key objectives of the new rules is, it said, to reduce the risk of bank credit and house price spirals.

In its latest bulletin, the Central Bank has forecast consumer spending growth of 2.2% for this year, an upgrade of 0.2% on its previous forecast and for exports to rise by 5.7%; 0.5% more than originally thought.

Overall, it expects the economy, in GDP terms, to grow by 3.8% this year and by 3.7% in 2016, while unemployment could drop to 8.7% by the end of 2016.

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