Gabriel Makhlouf: Introductory statement - Joint Oireachtas
Committee on Finance, Public Expenditure and Reform, and
Taoiseach
Opening statement by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland,
before the Joint Oireachtas (National Parliament) Committee on Finance, Public
Expenditure and Reform, and Taoiseach (Head of Parliament), Dublin, 25 January 2023.
* * *
Good afternoon Chairman, Committee members.
I am joined today by Deputy Governor Vasileios Madouros and Director of Consumer
Protection Colm Kincaid. We welcome the opportunity to appear before you.
I will begin by giving a brief overview of the economic outlook, before discussing the
changing macro financial environment in Ireland and our regulatory priorities for the
year ahead. I also want to touch on some of the issues that the Committee has
indicated it would like to discuss today.
Euro Area outlook
Looking back on 2022, the factors dominating economic activity included Russia's
unjustified war against Ukraine and its people, the energy crisis, rising inflation, the
state of labour markets and supply chains, and the ongoing impact of China's approach
to managing the pandemic.
Looking ahead, the most recent eurosystem staff projections, published in December,
show a decline in the outlook for the Euro Area, with more persistent inflation and
weaker growth.
The Euro Area has faced a number of inflationary shocks in the past two years, from
pandemic-related supply chain disruptions as well as strong demand once restrictions
were lifted, to sharp rises in energy and food prices due to the Russia's aggression.
Inflation was 9.2 per cent in December 2022, down from 10.1 per cent in November,
mainly due to falling energy costs. The outlook is for a decline to 6.3 per cent in 2023
and 3.4 per cent in 2024 reflecting moderating energy inflation and the impact of the
ECB's monetary policy decisions.
Monetary Policy
Despite the recent easing of inflation, it remains too high. High and volatile inflation
entails large costs for the economy and society as a whole.
The sharp increase in the cost of living over the past year has resulted in an erosion of
living standards. High inflation can also lead to lower investment, harming future growth
and economic potential. And the impact of inflation has not been felt uniformly across
the population with the groups most impacted being those that spend more of their
income on energy and food, such as lower-income households.
A return to price stability - that is, a rate of inflation in-line with our 2 per cent target
over the medium term - is necessary for a stable economic environment to support
long-term growth.
As interest rates are the primary tool to fight inflation, my colleagues on the ECB's
Governing Council and I started raising our key policy rates in July last year. These are
now at 2 per cent. Our primary mandate is price stability and we are determined to
achieve our inflation target by aligning aggregate demand more closely with aggregate
supply conditions in the euro area economy as a whole.
Raising the policy rate also signals our commitment to price stability. It sends a clear
message that we will not allow inflation to stay above 2 per cent and helps to contain
inflation expectations, guarding against the emergence of self-reinforcing inflation
dynamics and tackling the risk of a persistent increase in inflation expectations.
We need to continue to increase rates at our meeting next week - by taking a similar
step to our December decisions - and also at our March meeting, although our future
policy decisions need to continue to be data-dependent given the prevailing uncertainty.
To sum up, inflation remains far too high and interest rates will have to rise significantly
at a steady pace to reach levels sufficiently restrictive to ensure a timely return of
inflation to our 2 per cent medium-term target. Bringing inflation back to target is
essential for the wellbeing of our economy and community.
Domestic Outlook
Turning to the domestic outlook, our most recent Quarterly Bulletin described 2022 as a
year of two halves, with strong growth in the first half and slowing considerably in the
second.1
We expect that 2023 is likely to be a mirror of this year, with our economy continuing to
adjust to the energy shock but a strong labour market and moderating inflation driving a
recovery in household real incomes, reversing the trend later in the year and into 2024.
While the domestic economy was predicted to slow considerably, our forecasts still
pointed to positive (albeit lower) growth for 2023 as a whole. We will be updating these
projections in our next Quarterly Bulletin in early March.2
Domestic headline inflation continues to be high at 8.2 per cent in December, but
moderating energy prices, particularly gas prices, points to an improving outlook.
Our expectation remains that inflation peaked in Q4 of 2022 and will moderate as the
year progresses - assuming no further shocks - supporting consumer spending and
overall economic activity as the year progresses.
Macro-financial environment
There is no doubt that the macro-financial environment remains very challenging both
domestically and globally.
Over the past twelve months many asset prices have fallen sharply, yields have risen,
and market volatility has increased substantially. The fragility of certain markets and its
participants - particularly in the non-bank financial sector - was made all too apparent
by the gilt market disruption in the UK in September.
The inflationary challenges are being experienced most acutely as shocks to people's
real incomes and an erosion of their living standards.
The profit margins of businesses, particularly the smaller businesses with less scope to
pass on cost increases to customers, will suffer due to the size of their energy bills and
other costs as well as falling revenues as customers reduce discretionary spending.
Taken together, these pressures have the potential to lead to an increase in repayment
challenges for some borrowers.3
Overall, risks to the Irish financial system have risen. However, there are a number of
reasons to believe there is resilience in the system to meet these risks.
While some mortgage customers are experiencing directly the effects of our interest
rate decisions, there is substantial resilience across the mortgage market.
Lower levels of indebtedness, a gradual shift towards fixed rate borrowing, pandemic
savings and substantial housing equity, are all ensuring that the mortgage market as a
whole has significant capacity to absorb shocks.
Even in the SME sector, where cost increases will severely tighten profit margins for
many, indebtedness has fallen continually for a decade, reducing the risk of
macroeconomic spillovers between the financial sector and the real economy.
Regulatory priorities
We continue to engage with the banking sector, other lenders, insurers and investment
firms to ensure the financial system plays its proper role in supporting the economy and
users of financial services. Banks and other lenders in particular have a key role to play
by:
Providing the lending and deposit services required to support a well-functioning
economy;
Supporting customers who may be experiencing difficulties in light of the changed
macro-economic environment, including in particular customers in or facing
arrears on existing loans; and
Developing and implementing strategies which preserve long term sustainability
and firms' capacity to continue to support the economy through this period and
into the future.
The financial sector continues to change rapidly, in particular through digitalisation and
technological innovation. The entrance of new types of participants in the Irish financial
system and the evolution of existing sectors are bringing rapid evolution to the
landscape for financial users and firms.
In response, we are continuing to evolve our regulatory approach. To support financial
wellbeing, our regulation will continue to be outcomes-focused and follow six principles:
forward looking, connected, proportionate, predictable, transparent and agile.
Particular milestones in our regulatory work programme this year include:
Consulting and engaging widely on the development of our consumer protection
framework and on the operationalisation of the Individual Accountability
Framework;
Continuing to progress actions at a domestic and international level on the global
systemic risks in the funds sector, as well as enhancing the governance, oversight
and investor outcomes in the sector; and
Implementing new EU regulations on digital operational resilience and markets in
crypto.
Our supervisory priorities include the assessment and management of risks to financial
and operational resilience, continuing to drive for fair outcomes for consumer and
investors, overseeing the withdrawal of Ulster Bank and KBC from the Irish market and
detecting and sanctioning market abuse.
We will in particular work with the Department of Finance on the next steps from the
Retail Banking Review and the recommendations of the IMF's Financial System
Assessment Programme. We note and welcome the Joint Oireachtas Committees
recent report on Banking and are currently studying its recommendations.
Let me touch on a couple of issues before we turn to your questions.
Retail Bank Consolidation
The Central Bank continues to engage actively with the firms as part of its supervisory
programme on retail bank consolidation. We have made clear to the retail banks that
the bank exits, and in particular the large-scale migration of customer bank accounts
from Ulster Bank and KBC, must happen in line with customer needs and expectations.
The account migration, transfer of loans and other assets and winding down of the
business of Ulster Bank and KBC is a complex process, but it is on track and the
system is working well together and responding appropriately.
Our latest account migration statistics - published yesterday - indicate that, at
endDecember 2022, 65 per cent of current accounts were either closed or inactive.4
We expect all retail banks to have plans in place to manage the impact of the broader
changes and consolidation in the retail banking sector in Ireland. It is the responsibility
of the individual banks to ensure that they are putting their customer first, ensuring fair
treatment of customers and that customers understand what the changes mean for
them.
As a regulator we recognise that consumers need availability and choice of products
and services to meet their needs. The retail banking market needs to function
effectively to deliver this. For banking as for other financial services, we see regulation,
active consumer switching, innovation, transparency and competition, as being key to
effective market functioning.
Interest rates and the Irish mortgage market
Let me turn to the impact of interest rate rises on the Irish mortgage market. Part of the
transmission of monetary policy - essential to ensure that inflation returns to target - is
what we now see happening to mortgage rates.
Increases in the ECB policy rate are transmitted over time to households and firms'
borrowing rates via the financial sector. Lenders and credit servicing firms in Ireland
have increased rates on their mortgages in recent months.
Retail banks - who provide 84 per cent of all principal residence (PDH) mortgages -
have to date increased fixed rates for new or switching customers, and have not
increased their variable rates. Non-bank lenders and servicing firms have raised
variable rates, including some rates at the higher end of the market.
And of course customers on tracker products have seen their rate increase
automatically in line with the ECB rate. The impact of these rate increases on borrowers
will depend on a combination of the rate increase itself and the financial and personal
circumstances of the individual borrower, be they a private individual, a small business
or a large corporate body.
We have been clear with the firms we regulate that they need to be proactive in
supporting their customers to navigate these changes.
We will continue to engage actively with regulated firms on their approaches to
increasing interest rates and managing the impact of inflation, and how they support
their customers in line with the regulatory framework and our expectations.
As you know, the same regulatory protections apply whether a borrower's loan is with a
bank or with a non-bank lender or servicing firm.
The Central Bank does not have a statutory role in approving the rates that mortgage
lenders charge on their loans. These are commercial decisions for the lenders
themselves but we do expect firms to:
Have the resources and arrangements in place to assess applications from
existing and new or switching borrowers in a manner that is timely and based on
prudent lending standards applied consistently across all applicants;
Have fit-for-purpose arrangements in place to anticipate and deal with customers
in or facing arrears. This includes cases where consumers may face arrears due
to an increase in the interest rate on their mortgage, while recognising that with
increasing costs of living driven by inflation, this is just one factor currently
affecting people's repayment capacity; and
Proactively assess the risks and consumer impact that commercial decisions,
including rising interest rates, may pose to borrowers and have an action plan in
place to mitigate such risks.
Conclusion
The outlook for 2023 will continue to be characterised by high uncertainty. The Central
Bank will continue to focus on maintaining monetary and financial stability and ensuring
the financial system works for consumers and the wider economy.
Vas, Colm and I are happy to take your questions.
1
https://www.centralbank.ie/docs/default-source/publications/quarterly-bulletins/qbarchive/2022/quarterly-bulletin-q4-2022.pdf?sfvrsn=1666951d_6
2
https://www.centralbank.ie/publication/quarterly-bulletins/quarterly-bulletin-q42022#Box-B-The-Impact-of-Gas-Prices-on-the-Forecast-40256a7c-dc86-4bc4-8d99e5dfbb2dcba3
3
https://www.oecd.org/economic-outlook/november-2022#gdp
https://www.imf.org/en/Publications/WEO/Issues/2022/10/11/world-economic-outlookoctober-2022
4
Account Migration Statistic