Source: Central Bank and Financial Services Authority of Ireland

The Central Bank said today that monthly changes in Irish residential mortgage lending in October and November were historically low. However, mortgages increased by €281 million in December, leaving the average monthly increase for the year of  just €676 million, compared with €1.4 billion in 2007. This resulted in the annual rate of increase in December fell to 5.8 per cent¹, the lowest annual rise since 1986.

Private-sector credit (PSC)² declined by €9 billion in December. A large portion of this decline, however, was accounted for by a fall of over €4 billion in lending to non-bank IFSC companies, which have tenuous connections with the domestic economy. Within this €4 billion, the decline was recorded in non-euro denominated lending to IFSC companies; exchange rate movements can account for some of the fall, alongside maturing loans. Credit to non-financial corporates i.e. businesses fell by an underlying €2.8 billion. The nonmortgage credit growth rate is quite volatile, and has been boosted from time to time by large scale transactions between banks and other parts of the broad financial sector. As a consequence, non-mortgage credit increased by 13.5 per cent in the year to December 2008.

More relevant to the NFC sector, the annual increase in non-mortgage loans was close to 2 per cent in December.

The annual rate of increase declined to 6.6 per cent³ in December 2008, from 8.4 per cent in November, while the annual growth rate of non-mortgage credit, which includes credit to other parts of the broad financial sector, was 13.5 per cent.

The annual rate of increase in outstanding indebtedness on credit cards fell to 4.6 per cent in December. New spending increased by €240 million over the month, while payments received were €151 million higher. However, credit card customers spent less on their cards in December 2008, compared with December 2007.

The net increase in residential mortgages (inclusive of securitised mortgages) of €8.1 billion over 2008 as a whole, was exactly half that recorded in 2007.

General economic conditions have reduced confidence and dampened demand for mortgages. There may also be an incentive to delay house purchase due to falling house prices. At the same time, despite falling official interest rates, mortgage credit is harder to obtain as banks tighten lending standards and withdraw some products from the market, such as 100 per cent LTV ratio mortgages.

Money market interest rates fell sharply again in December, with most terms falling by more than the 75 basis point cut in the ECB main refinancing rate. The largest decrease was in the 1-month rate, which fell by 97 basis points over the month, followed by the 3-month rate, which fell by 96 basis points. Funds provided by the Bank as part of the ECB’s monetary policy operations increased by just €222 million, compared with an increase of €6.6 billion in November (Table C2). In addition, deposits placed with the Bank amounted to €8.2 billion inDecember, representing a month-on-month increase of €5.6 billion. The euro strengthened significantly against the US dollar in December, increasing by 9.4 per cent, while it reached a life-time high against sterling, appreciating by 14.8 per cent over the month. The euro also rose against the Japanese yen, by 3.9 per cent. Exchange-rate movements resulted in a 3.9 per cent increase in Ireland's average nominal harmonised competitiveness indicator (HCI)⁴ in December, which rose from 109.3 in November, to 113.6 in December.