gabriel makhlouf : opening 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, at the joint oireachtas committee on finance, public expenditure and reform, and taoiseach, dublin, 20 september 2023. * * * good afternoon chair, committee members. thank you for your invitation to appear before you today. i am joined by deputy governors vasileios madouros and derville rowland. i will begin by giving a brief overview of the economic outlook, before discussing how our monetary policy decisions to tackle inflation are transmitting through the financial system to the broader economy – to households and businesses. i will also give an overview of the strong protections that we have in place for those who get into financial distress in this rising interest rate environment. we very much recognise that this is a challenging economic environment for many people. the community has been facing an unprecedented inflationary shock which has impacted significantly on households'weekly shop, their tank of fuel, and their energy bills, to name but a few issues. in response, the ecb has raised interest rates at an unprecedented pace. this has meant an increase in mortgage repayments for some, particularly for those on tracker rates, but also borrowers on variable rates and those newly applying for credit. but our measures are necessary to ensure that inflation returns back to our 2 per cent target over the medium term. if inflation becomes entrenched across the economy, the overall costs to society – including of subsequent actions to bring inflation back to target – will be much larger. the economic outlook yesterday we published our latest quarterly bulletin which gives our current assessment of the irish economy. our forecasts suggest ireland's economy will grow by 2. 9 per cent this year, and by 2. 6 and 2. 3 per cent in 2024 and 2025 respectively. we have one of the strongest growth rates in the euro area and labour market conditions continue to remain tight : employment has reached record levels ; unemployment is very low and vacancies across the economy – although they have eased more recently – remain above pre - pandemic levels. we are entering a period where domestic growth may be more constrained than we have previously seen. there are different reasons for this. first, capacity constraints in the economy are becoming more binding, as evident in the very tight labour market. second, tighter monetary policy is gradually

ecb is taking the necessary decisions to get inflation back to target but of course, monetary policy is set for the euro area as a whole, whereas fiscal policy remains a national competence. so, as we come up to the budget, it is important that fiscal policy doesn't add to our own domestic inflation problem. it would be counter - productive for domestic policy to stimulate demand and result in in a period of higher and more prolonged inflation in ireland than currently expected. it would damage the competitiveness of the irish economy and potentially undermine its ability to deliver sustainable growth in living standards. we are a small open economy with high debt levels and are vulnerable to shifts in the global economy. we tend to experience greater extremes compared to larger and more diversified economies, which has implications for both price and financial stability. we must take the opportunity to enhance medium to longer term resilience in both the public finances and the economy as a whole. in this context i want to again welcome 2 / 5 bis - central bankers'speeches the minister's proposal to establish a long - term savings fund, which takes into account the current windfall nature of excess tax receipts. the impact of monetary policy on lending, deposits and consumers monetary policy works through multiple channels. a central channel is the banking channel, via pass - through to credit and deposit rates. we are seeing monetary policy transmit to the irish economy, with increases in the interest rates on loans and deposits over the past year. this transmission has been particularly strong in terms of new loans to, and term deposits from businesses. but, to date, irish banks have lagged behind euro area banks with respect to pass - through of interest rate increases to the household sector. in terms of household deposits, our latest evidence ( some of which we recently published ), shows that pass - through has been slow, both relative to euro area peers and our own experience in the last tightening cycle. there are a number of potential factors contributing to slow pass - through. for example, deposit to loan ratios in irish banks are particularly high, which means banks don't need to attract deposits. moreover, competition dynamics in the market for banking services are very different now, relative to the last tightening cycle. consumer inertia may also be a factor, as we have seen less of a shift into term deposits than in other euro area countries. around 94 per cent of deposits from households are in demand deposits and current accounts, rather than term deposits or notice accounts. in terms