The slowdown in major global economies must be of concern to Ireland, the International Monetary Fund has warned.
The fund’s intervention, amid political stalemate in the Dáil, came as the US Federal Reserve took note of risks from the uncertain global economy as it held American interest rates steady.
The IMF is lukewarm on the clamour for the Central Bank of Ireland to relax mortgage lending restrictions, saying more data is required before any move to refine the rules.
While finding that purely domestic risks to financial stability are contained, the IMF warned such risks could regain importance “if an economic boom accelerates”.
IMF inspectors
A statement from the fund followed its assessment of Ireland’s financial sector, an exercise carried out every five years. IMF inspectors visited Dublin this month and in December for meetings with Irish officials.
The fund said the Irish economy was clearly rebounding, adding that vulnerabilities reflect the openness of the financial system and the economy in general. “Recent indicators of economic slowdown in some major countries must be of concern to a country such as Ireland that is dependent on trade in goods and services, and foreign direct investment.
“In particular, the tight linkages with the UK financial system warrant the ongoing attention of the authorities.”
Such remarks came on a day in which British chancellor George Osborne downgraded his growth forecasts for the next five years.
“The crisis legacies of heavy private and public debt burdens (especially for households with high loan-to-value ratios), a persistent stock of impaired loans, and high, albeit declining, unemployment mean that a large negative external shock could have a significant impact on the financial system.”
There may be pockets of vulnerability due to the rapid rise in commercial real estate prices , but foreign funding reduced domestic financial linkages, the fund found. On Central Bank loan caps, the IMF said Ireland’s boom-bust experience demonstrates the need for action to head off incipient problems.
“The recently introduced limits on loan-to-value and loan-to-income ratios on residential mortgages should be seen in this light,” it said.
“There is some evidence that these tools have had a stabilising effect on house prices and house price expectations. The measures, however, are still very new; more information is needed before trying to refine their calibration.”
Moderate growth
After raising interest rates a little in December for the first time in almost a decade, the Fed said yesterday evening that moderate growth and strong job gains would enable it to tighten policy later this year,
Projections suggest the Fed expects two quarter-point increases this year, half the amount foreseen in December.
“A range of recent indicators, including strong job gains, points to additional strengthening of the labour market. Inflation picked up in recent months. However, global economic and financial developments continue to pose risks,” the Fed said.
