Makhlouf warns against ‘untargeted’ tax relief for mortgage borrowers

Governor Gabriel Makhlouf said he was concerned about some proposals being considered by politicians because they would work against European Central Bank (ECB) policies to tame inflation.

“Some of the proposals out there look as if they are deliberately trying to counteract monetary policy action,” he said, explaining the ECB is trying to reduce demand in the economy by hiking interest rates.

“If the public as a whole conclude that every time interest rates go up, governments will counteract them, then that just gets you into a world where monetary policy needs to do more.

“When governments make budget decisions, they need to think very carefully about the design and what is the impact they're trying to have. Will it actually deliver, and what will its unintended consequences be?”

Sinn Féin has called for temporary and targeted mortgage interest relief for those on tracker mortgages who have absorbed the full weight of the ECB’s 3.75pc in interest rate increases since July.

Although the Government initially rejected the demand, Taoiseach Leo Varadkar relented last month and said relief for mortgage borrowers would be considered as part of Budget 2024.

Mr Makhlouf was speaking at the release of the Central Bank’s first Financial Stability Review for 2023.

The report, which looks at the risks facing the Irish economy and financial system, warned that the global economy remained vulnerable to high inflation and tightening financial conditions.

It said that the risk from shocks, such as the recent market turbulence that followed the failure of Silicon Valley Bank, was still elevated and that geopolitical instability was a source of uncertainty.

But the report also noted that the Irish economy was proving resilient in the face of these pressures.

The review acknowledged that while many were stretched by the increase in the cost of living, households and businesses were absorbing high inflation without major problems.

The Central Bank said low levels of borrowing and record high savings in the economy meant that recent increases in interest rates were having a limited impact on financial stress.

However, the bank warned that persistent inflation coupled with a slowdown could expose vulnerabilities, leading to more credit risk and arrears.

Director of Financial Stability Mark Cassidy said the Irish banking system had the capacity to absorb potential shocks, due to improved profits, high capital levels and ample available cash.

Nonetheless, the Central Bank is making banks increase their emergency buffers over the next year to deal with any potential shocks that may emerge.

On the public finances, Mr Makhlouf echoed recent warnings from the Irish Fiscal Advisory Council about the Government’s reliance on corporate tax receipts from a small number of large companies.

The report said Ireland was in a position of fiscal strength, but needed to exercise prudent fiscal planning.