Slowdown in corporation tax receipts now 'closer to materialising'
Governor of the Central Bank of Ireland Gabriel Makhlouf: 'The full extent of higher interest rates and monetary policy pass-through still lies ahead.' Picture: Darragh Kane
Despite resilience in the Irish economy and inflation coming down, a number of risks are “closer to materialising” including a slowdown in corporation tax receipts and exports, the Central Bank of Ireland has warned.
According to the bank’s latest financial stability review, as a result of high inflation — which has been falling but underlying inflation has proven to be more persistent — the global economy is facing higher interest rates over a prolonged period of time which is raising the risk to financial markets.
Speaking on the publication of the review, Gabriel Makhlouf, governor of the Central Bank, said the Irish economy has continued to expand since the last review in June “albeit at a slower pace” with a resident labour market and strong wage growth.
However, he added that a number of previously flagged risks are “now closer to materialising”.
Among these risks include signs of a slowdown in exports and corporation tax receipts following years of successive growth. In addition, commercial real estate prices in Ireland have fallen by more than 20% since the middle of 2020.
“The lagged effect of monetary policy actions remains a source of uncertainty for the domestic economy, as the financial system continues to pass through higher interest rates gradually to borrowers and depositors,” Mr Makhlouf said.
The bank added that the global economy is at risk of further inflationary shocks from geopolitical tensions, signs of fragmentation of the global economy, and extreme weather events.
Despite these increasing risks, Mr Makhlouf said that the domestic household, business, and banking sectors continue to “demonstrate resilience in aggregate” as a result of income growth, low indebtedness and prudent borrowing.
“Although there are early signs of repayment challenges for some vulnerable borrowers,” the bank said as it advised anyone finding themselves in this position to contact their lender as soon as possible.
“The full extent of higher interest rates and monetary policy pass-through still lies ahead,” the bank said.
The banking sector in Ireland is continuing to increase profits driven by higher interest rate margins. However, Mr Makhlouf said “we must be clear-eyed in our assessment that this will not last forever”.
“There are significant risks to the outlook, including increases in financial distress, a repricing in global and local commercial real estate markets, weakening loan growth and increased funding costs. In light of these headwinds, this is a time to be prudent,” he said.
The Central Bank announced that it would be keeping its Countercyclical Capital Buffer (CCyB) - a capital requirement for the sustainable provision of credit to the economy in the banking system - at 1.5%.
“A key feature of the CCyB is that, if a shock were to hit the economy, its release would better enable the banking system to absorb losses and facilitate a sustainable flow of credit to the economy,” Mr Makhlouf said.
