‘Uncertainty will remain a central feature of the backdrop against which policy makers must make difficult decisions’ - Deputy Governor Donnery addresses Dublin Economic Workshop Annual Economic Policy Conference

• Ireland’s experience of the crisis and downside risks to the economy provides ample justification for the introduction of macroprudential measures.
• Evidence threshold to adjust mortgage rules is significant. Stable rules are valuable for both households and mortgage lenders in eliminating avoidable uncertainty about the regulatory regime.
• UK vote to leave the EU has led to heightened risk and uncertainties.

Deputy Governor of the Central Bank of Ireland, Sharon Donnery, today addressed the Dublin Economic Workshop’s Annual Economic Policy Conference on the theme ‘Macroprudential policy: action in the face of uncertainty’.

The speech focused on the Bank’s framework for macroprudential policymaking, detailing the Bank’s toolkit in this area which has been under constant development since the crisis. The measures introduced by the Bank, including the Other Systemically Important Institutions (O-SII) buffer, the Countercyclical Capital Buffer (CCyB), and the loan-to-value and loan-to-income mortgage regulations. These measures aim to enhance both the resilience of the financial system and protect borrowers.

In reference to the range of instruments which can be put in place Ms Donnery said ‘although the costs of the measures can be immediately felt and is quantifiable to the banks or borrowers to which they apply, the benefits are often unobservable’.

With specific reference to the mortgage rules she stressed their importance in enhancing the resilience of both borrowers and the banking sector.

She said ‘the evidence threshold to justify a material loosening or tightening of the rules is significant for two reasons.  First, stable rules are valuable for both households and mortgage lenders in eliminating avoidable uncertainty about the regulatory regime. Second, the noisy and volatile nature of macro-financial data means that it would be unwise to seek to adjust the rules in response to minor and temporary fluctuations in the state of the financial cycle: such a fine-tuning approach could actually aggravate financial instability if revisions proved to be unwarranted or badly timed.’

Discussing the impact of the UK vote to leave the EU she said that the precise impact on the Irish economy is uncertain but the short and medium term impact is likely to be negative.  She said: ‘Ireland is the most exposed European economy to the potential effects of Brexit. This is because the UK accounts for a large percentage of Irish imports and exports.  Labour flows and cross-border investment linkages are considerable. And certain domestic Irish banks have large exposures to the UK.’

She added: ‘There is considerable uncertainty regarding the specific political and institutional construct which may emerge once the UK decides to trigger Article 50 of the Treaty. This makes it challenging to estimate the impact on the Irish economy.’

Read Deputy Governor Donnery’s address - Macroprudential policy: action in the face of uncertainty.