Central Bank governor says surge in household savings is only temporary

Governor of the Central Bank Gabriel Makhlouf said consumer spending will resume once the economy reopens. Picture: PA

The huge increase in savings by Irish households due to the pandemic-related restrictions will not lead to a change in capital requirements on banks and credit unions the Governor of the Central Bank has said.

Gabriel Makhlouf was speaking at the University of Limerick on the outlook for the Irish economy for the year ahead. The closure of retail, bars and restaurants along with a global shutdown of air travel has significantly reduced consumer spending and led to a surge in savings and deposits.

At an event facilitated by Professor Stephen Kinsella, the Governor was asked if there was any appetite to revise regulatory capital requirements on banks and credit unions in light of a 'savings glut'. 

"Firstly we are being quite cautious about the huge increase in savings," Mr Makhlouf said. "We dont necessarily see this increasing into the long term. We do see, once the economy reopens, spending continuing by consumers."

"We look continuously at the requirements of institutions and individual borrowers but I don't think what I see as a temporary increase in savings is going to lead us to change materially our capital requirements."

In his speech Mr Makhlouf said evidence from consumer behaviour points to a potential surge in demand in the second half of the year. “Supported by strong government income support measures, we forecast modified domestic demand to increase by 2.9 per cent this year, following an estimated decline of around 7.1 per cent in 2020.” 

However he cautioned that this remains contingent on key assumptions regarding Covid-19 developments. “All of our work will of course be dominated by our ongoing focus on the pandemic. We will continue to deepen our understanding of its impacts and take any necessary steps to enable the financial system to support the recovery.”