Central Bank governor Gabriel Makhlouf has signalled he has become more cautious in recent weeks on the European Central Bank (ECB) making big rate cuts, particularly as services inflation remains elevated.
Mr Makhlouf also warned on Wednesday – as the regulator published its biannual report on risks to financial stability – of growing geopolitical tensions and the risk of a “sharp” fall in stocks prices amid heightened technology sector valuations.
The governor said a few weeks ago he would have to see significant data evidence to prompt him to vote for the European Central Bank (ECB) governing council to go for a bigger rate cut than its recent series of quarter-of-a-percentage-point reductions.
“The data I have seen since then only reinforces my view that prudence and caution would remain the right approach,” he said at a briefing on the latest Financial Stability Review.
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Euro zone inflation climbed to an annual rate of 2.3 per cent in November from 2 per cent the previous month, while services prices remained particularly elevated, at 3.9 per cent, according to figures published by Eurostat, the EU’s statistics agency, at the end of last month. Still, the ECB had cut rates three times since June and is widely expected by economists to follow up with a fourth reduction next week.
The Central Bank said the balance of risks has shifted from inflation, when it published its last Financial Stability Review in June, to economic expansion as growing geopolitical tensions “raise the prospect of lower trade” and gross domestic product growth.
Mr Makhlouf and the bank’s director of financial stability, Mark Cassidy, also highlighted a “widening disconnect” between economic uncertainty and low volatility in global equity and debt markets.
This increases the chances of a “sharp repricing of assets”, they said, noting that tech stocks, particularly the so-called magnificent seven – Tesla Meta, Microsoft, Alphabet, Amazon, Apple, and Nvidia – are highly valued. The advance of these stocks in recent times have contributed to a rise in the value of assets on Ireland’s international funds sector.
The report listed the ongoing war between Russia and Ukraine and conflict in the Middle East as key geopolitical concerns. Mr Makhlouf also highlighted fears about a possible US-China clash over Taiwan and the impact from a slew of national elections globally. Still, he refused to speculate on how Donald Trump’s re-election as US president might affect global trade.
“Let’s not get too far ahead of ourselves,” he said. “We really do need to wait and see exactly what is going to happen.”
However, he noted how Ireland’s small, open economy – highly dependent on US foreign direct investment – means “we just need to be very careful and very vigilant”.
The report said the Irish commercial real-estate market is showing “emerging signs of stabilisation”, following a 30 per cent decline in asset values from the pre-pandemic peak amid a spike in interest rates and a shift in working and shopping habits.
“Survey data indicate that market participants expect further, albeit less acute, declines in capital values over the coming year, with a continuation of the bifurcation (divergence) seen in some sectors between prime and non-prime assets,” it said.
It also noted that banks’ profitability is likely to have peaked, with net interest margins – the difference between the average rate at which banks fund themselves and lend on to customers – set to tighten as official interest rates continue to decline.
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