Source: The Central Bank and Financial Services Authority of Ireland

The Central Bank said today that the annual rate of increase in Irish residential mortgages (including securitised mortgages) declined to 9 per cent in August, from 9.6 per cent in July - - the lowest annual rate of increase since mid-1987.¹ The bank said that there was a marked weakening in Irish residential mortgage lending in August, with the monthly increase of €508 million being just over half that recorded in July. While August is usually not a strong month for residential mortgage borrowing, this increase was exceptionally low, and was just a quarter of that recorded in August 2006.

Despite tighter credit standards, private-sector credit (PSC)² increased by a robust €3.6 billion in August, bringing the total increase in PSC for the year to date to €23.1 billion. This was a third less that the amount of credit extended during the same period twelve months earlier, while the annual rate of increase declined to 12.9 per cent³ in August, which was the lowest annual growth rate since July 2002. Lending to non-financial corporates accounted for most of the increase in PSC. However, the annual growth rate of non-mortgage credit dropped by 0.2 percentage points in August, to 18.6 per cent.

New spending and repayments on credit cards were noticeably lower in August than in July. Total outstanding indebtedness edged above €3 billion, but the annual rate of increase remained unchanged at 10.2 per cent.

There was a marked weakening in residential mortgage lending in August, with the monthly increase of €508 million being just over half that recorded in July. While August is usually not a strong month for residential mortgage borrowing, this increase was exceptionally low, and was just a quarter of that recorded in August 2006. The annual rate of increase in residential mortgages (including securitised mortgages) declined to 9 per cent in August, from 9.6 per cent in July; this was the lowest annual rate of increase since mid-1987.3

Although house prices have been falling for 18 months, and the permanent tsb/ESRI house price index recorded an annual decline of 10 per cent in August, more affordable houses have not yet boosted residential mortgage borrowing. In addition, banks participating in the July euro area Bank Lending Survey reported tighter credit standards on loans to households, and attributed this to a rise in their costs of funds and an increased perception of risk – in particular, general expectations regarding economic activity.

There were mixed movements in money market interest rates in August, with the 12-month rate falling by 3 basis points, while the 1-month rate rose by 3 basis points. Funds provided by the Bank as part of the ECB's monetary policy operations fell by €814 million in August, with main refinancing operations accounting for over half of the decrease. The euro weakened by a sizeable amount against both the US dollar and the Japanese yen in August, declining by 5.6 per cent and 5.2 per cent, respectively. The euro strengthened by 2 per cent against sterling in August, bringing it close to its lifetime high towards the end of the month. Exchange-rate movements resulted in a 1.6 per cent fall in Ireland's average nominal harmonised competitiveness indicator (HCI)⁴ from 115.4 in July, to 113.6 in August.

Source: The Central Bank and Financial Services Authority of Ireland

Total lending by credit institutions in Ireland to non-Government Irish residents increased by €3.6 billion in August, or 0.9 per cent, to €399.9 billion. Euro-denominated lending accounted for nearly two-thirds of the increase. Lending to non-bank IFSC companies rose by €710 million over the month.

The changes in the main PSC loan categories on credit institutions' balance sheets in August were as follows:

• Term/revolving loans increased by €1.3 billion;

• Residential mortgages (unadjusted for securitised mortgages) were €683 million higher;

• Other mortgages rose by €34 million;

• Loans up to and including one year were €969 million higher; and

• Overdrafts expanded by €388 million.

Credit institutions in Ireland accounted for €212.4 billion of the euro area's broad money supply (M3) in August, a monthly increase of €2.5 billion, or 1.2 per cent. Annually, M3 declined by 9.6 per cent in August, from a year-on-year decrease of 10.3 per cent in July.

There was a large inflow into deposits with an agreed maturity of up to two years, which increased by €2.9 billion over the month, but most of the increase was in the up to one year agreed maturity sub-category. This was somewhat offset by a decline in overnight deposits, leading to an aggregate change in money supply deposits of €1.5 billion. Among the remaining components of M3, the largest movement was in repurchase agreements, which rose by €452 million over the month.

• Overnight deposits declined by €1 billion;

• Deposits redeemable at notice of up to three months fell by €313 million; and

• Deposits with an agreed maturity of up to two years increased by €2.9 billion

1 The weighted average growth rates of mortgage and non-mortgage credit do not equate to the PSC growth rate because securitised residential mortgages are included in calculating the adjusted growth rate for residential mortgages, but are not included in PSC.

2 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.

3 Adjusted rate i.e. excluding lending to non-Monetary Financial Institutions (MFI) IFSC entities, which are not associated with the domestic economy, and adjusted for valuation effects caused by exchange-rate movements.

4 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.