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| Source: Central Bank and Financial Services Authority of Ireland |
The Irish Central Bank said today that demand for credit in 2007 was moderate, after the record year of 2006. The end-year rate of increase in private-sector credit (PSC)1 was 17 per cent2, which was the lowest in five years.
The Bank says that there was an unusually large increase in lending to non-bank IFSC companies in 2007. Some of the rise was accounted for by loans to Special Purpose Vehicles (SPVs) to finance offshore financial transactions, while there was also evidence that some credit institutions reorganised their funding structures as a result of the recent turbulence in the credit markets.
PSC rose by €4.1 billion in December; however, the monthly rise would have been over €6 billion, had it not been for an asset-backed securitisation of residential mortgages.3
After record growth rates in 2006, the pace of increase in non-mortgage credit began to decelerate during 2007. A slowdown in lending to the construction and real estate sectors was evident during the year, and the end-year adjusted growth rate of 20.6 per cent was over 10 percentage points lower than twelve months earlier. Credit card holders spent €1.3 billion in December, €81 million more than the year before. This was mostly offset by sizeable payments received of €1.2 billion, and at end-2007 outstanding indebtedness on credit cards was just 9.3 per cent higher than twelve months earlier. Outstanding indebtedness had been reduced substantially during the year, when an unusually large €217 million was repaid in May, most likely the result of maturing SSIA accounts.
Borrowing by households for house purchase was subdued in 2007, when compared with the previous two years.
The Bank said that outstanding mortgages rose by €16.6 billion, which was 30 per cent less than in 2006. Although housing supply remained strong during the year, with completions at 78,027 units, and good supply in the second-hand market, mortgage demand failed to recover from a weak start to the year. Rising interest rates in H1 2007, and uncertainty over stamp duty reform, may have tempered demand. While falling house prices have been positive for affordability, uncertainty as to future developments may have affected potential purchasers. The December increase in outstanding residential mortgages of €1.4 billion equalled the average for the year, and brought total outstanding mortgages to €139.8 billion.
The end-year growth rate of residential mortgages (inclusive of securitised mortgages) was 13.4 per cent, compared with 24.2 per cent a year earlier.4 This is the lowest annual growth rate in twelve years.
There were mixed movements in market interest rates in December. There was a sharp rise in the 1-month rate at the end of November due to uncertainties related to the year-end, while both the 3-month and 12-month rates had been on a broadly upward trend since mid-November. On 18 December 2007, during the final maintenance period of the year, the ECB made a large amount of additional funding available. As a result, pressure on the 1-month and 3-month rates abated and they ended the month 53 and 13 basis points below end-November levels, respectively.
Funds provided by the Bank as part of the ECB’s monetary policy operations to deal with year-end demand for liquidity, increased by €6.9 billion in December. This increase in support was largely offset, however, by fixed-term deposits of over €5 billion being placed with the Bank. The euro depreciated against the dollar in December, by 0.3 per cent, but continued to appreciate against sterling, rising by 2.6 per cent.
The euro was also 0.9 per cent higher against the Japanese yen. Exchange-rate movements resulted in a 0.2 per cent increase in Ireland's nominal harmonised competitiveness indicator (HCI)5 from 110.2 in November to 110.4 in December.
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| Source: Central Bank and Financial Services Authority of Ireland |
Private-Sector Credit
Total lending by credit institutions in Ireland to non-Government Irish residents increased by €4.1 billion, or 1.1 per cent, in December to €376.8 billion. Non-euro lending accounted for half of the increase in PSC, while lending to non-bank IFSC companies increased by €1.1 billion over the month. Non-euro lending has been boosted by the strong increase in lending to non-bank IFSC companies since September 2007.
1 The money and credit statistics are provided by all of the credit institutions authorised to carry on banking business in the State under Irish legislation as well as credit institutions authorised in other Member States of the EU operating in Ireland on a branch basis. Credit institutions authorised in other EU Member States operating in Ireland on a cross-border basis, i.e., with no physical presence in the State, are not included in the statistics.
2 Adjusted rate i.e. excluding lending to non-bank IFSC entities, which is not associated with the domestic economy, and adjusted for valuation effects caused by exchange-rate movements.
3 Such securitised mortgages are removed from credit institutions’ books, and consequently, are excluded from total PSC. For further details on the securitisation process, see Box 3 in Kelly, J., ‘Benchmarking Irish Private-Sector Credit’, Central Bank of Ireland, Spring Quarterly Bulletin, 2004.
4 The weighted average growth rates of mortgage and non-mortgage credit do not equate to the PSC growth rate because securitisations are included in calculating the adjusted growth rate for residential mortgages, but are not included in PSC.
5 A decrease in the indicator points to an improvement in price competitiveness, while an increase points to a disimprovement. For background, see Box B in the ‘Domestic Prices, Costs and Competitiveness’ chapter of the Bank’s Quarterly Bulletin, No. 2 2007.
