A report on financial stability from the Central Bank says that, while the Irish economy has shown resilience in the face of higher costs, it remains vulnerable to a longer period of inflation and an economic slowdown.

Writing in the latest Financial Stability Review, Governor Gabriel Makhlouf (pictured) signalled that more interest-rate rises from the European Central Bank (ECB) were on the way, stating that “more work is needed from monetary policy in the short run”.

“Core inflation in particular has proved more stubborn than many would have predicted,” he said.

The ECB’s Governing Council is due to meet to discuss interest rates next week.

Bank profits

The Central Bank also said that it would increase the level of capital that banks must hold in reserve to deal with potential financial shocks.

The review said that the Irish banking system had the capacity to absorb potential future shocks, while profits were expected to remain higher due to higher interest rates.

In a move aimed at further strengthening the banks’ resilience, the Countercyclical Capital Buffer (CCyB) rate will increase from 1% to 1.5% from June 2024.

Commercial property falls

Makhlouf said that the Irish economy had “continued to surprise” with its resilience, and that growth forecasts had improved, but he warned that “a range of adverse outcomes” could still materialise.

“Rising interest rates have already had immediate effects in the commercial real-estate market, and appear to be slowing the housing market in recent months,” he added.

The review shows that commercial property prices fell by 9.4% in the year to the end of March, adding that the knock-on effects on the wider economy and the banks currently appear to be “relatively contained”.

While acknowledging that many households and businesses were experiencing challenges with the cost of living, the Central Bank chief said that lower levels of indebtedness, household-income growth and strong employment levels were “a key source of strength”.

“Our assessment is that, if the economy continues to evolve in line with our expectations, we are likely to see only modest increases in financial stress among domestic borrowers, despite clear challenges for some groups of borrowers,” he stated.

Non-bank financial sector

On mortgage measures, Makhlouf said that the regulator would be carrying out detailed analysis of changes made its lending framework late last year.

He also signalled that the Central Bank would publish a discussion paper on its policy on the non-bank financial sector, adding that it was working with other authorities to develop an international framework for the sector.

Late last year, the bank announced plans to introduce new rules for Irish funds that invest in Irish property.