Central Bank and Financial Services Authority of Ireland

The Central Bank said today that the annual rate of growth of Irish residential mortgages in October fell to a 22-year low. The rate of increase was 7.6 percent.

Outstanding PSC¹ (Private Sector Credit) increased by €2.1 billion in October and exceeded €400 billion for the first time. However, most of this increase took the form of non-euro lending to ‘Other Financial Institutions', which are not generally associated with activity in the domestic economy. In this regard, lending to non-bank IFSC companies increased by €1.6 billion over the month while non-euro lending increased by €2.3 billion. The annual rate of increase in PSC has been falling since April and reached 9 per cent in October, down from 10.7 per cent in September and 18.5 per cent in October 2007.²

The Bank said that net monthly increase in residential mortgages (including securitised residential mortgages) during October was just €26 million – the lowest monthly increase recorded in recent years. This compares with an average monthly increase of over €700 million in the previous three months. Mortgage lending had recovered somewhat in September after a very quiet August. However, the Irish results of the euro area Bank Lending Survey showed that credit standards on loans to households for house purchase tightened during the third quarter of 2008, and this is reflected in the October data. The annual rate of increase in residential mortgages declined to 7.6 per cent in October, from 8.5 per cent in September, the lowest annual growth rate since 1986. ³

The Centarl Bank said that money market interest rates fell sharply in October, in line with market expectations of the future path of key ECB interest rates. The 3-month rate fell by 52 basis points, the overnight rate by 58 basis points and the 12-month rate by 63 basis points. Funds provided by the Bank as part of the ECB's monetary policy operations increased by €23.1 billion in October, partly reflecting a change in the ECB's allotment policy. This increase in support was offset by deposits of €7.5 billion being placed with the Bank. During October, there was a marked depreciation in the euro against the US dollar and the Japanese yen and a small decline against sterling. Exchange-rate movements resulted in a 2.5 per cent fall in Ireland's average nominal harmonised competitiveness indicator (HCI)⁴ from 112.4 in September to 109.6 in October.

Central Bank and Financial Services Authority of Ireland

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

• Term/revolving loans decreased by €74 million;

• Residential mortgages (unadjusted for securitised mortgages) were €196 million higher;

• Other mortgages decreased by €98 million;

• Loans up to and including one year were €2.1 billion higher; and

• Overdrafts contracted by €934 million. Overdrafts typically record a seasonal fall in October. In addition, about half of this months decline was accounted for by banks' non-bank affiliates.

Money Supply

Credit institutions in Ireland accounted for €208.9 billion of the euro area's broad money supply (M3) in October, a monthly decrease of €4.4 billion, or 2.1 per cent. Annually, M3 declined by 9 per cent in October, from a year-on-year decrease of 6.8 per cent in September.

Deposits with an agreed maturity of up to two years fell by €5.4 billion, with €2.1 billion of this accounted for by a fall in deposits from residents in other monetary union member states.

Debt securities with up to two years maturity issued by Irish MFIs (Monetary Financial Institutions) decreased by €1.9 billion and holdings of euro-area debt securities by Irish MFIs, which are netted out of the money supply contribution, rose by €1.2 billion, leaving an aggregate decrease of €681 million.

These movements were offset somewhat by a rise in money market fund shares/units, of €1.7 billion.

• Overnight deposits rose by €285 million;

• Deposits redeemable at notice of up to three months fell by €829 million; and

• Deposits with an agreed maturity of up to two years decreased by €5.4 billion.

There had been an underlying outflow from Irish resident deposits in September, but this was followed by a strong reflow in October. However, these developments were offset in the aggregate data by large deposits from financial companies in September, which were withdrawn in October.

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-Monetary Financial Institutions (MFI) IFSC entities, which are not associated with the domestic economy, and adjusted for valuation effects caused by exchange-rate movements.

3 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.

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.