Lending ‘well below’ long-term level required

The subdued level of bank lending in the economy is leaving the country short of the levels of credit required for long-term sustainable growth, a leading economist has warned.

New figures released by the Central Bank yesterday showed a continuation of the recent trend whereby loans to Irish households again declined on an annual basis.

Household loan repayments surpassed new lending by €346m during July, following a net monthly decline of €163m in June.

To the end of July, mortgage repayments exceeded drawdowns by more than €2bn while repayments on non-housing loans reduced Irish households’ debt by a further €640m over the same period.

While an improvement in the financial situation of some households has contributed to the reduction of overall debt in homes across the country, much of the decline is also as a consequence of a subdued lending market.

While lack of availability in some sectors has been cited as an issue, a lack of demand for credit is also to blame.

A number of issues are at play with the Central Bank’s mortgage lending rules introduced earlier this year likely to have a dampening effect on the number of new home loans.

The understandable reluctance of households with high levels of Celtic Tiger-era debt to take on more is another consideration.

These factors among others have resulted in a general level of bank lending below that required for long-term economic prosperity, according to Merrion Stockbrokers chief economist Alan McQuaid.

“As we’ve said on numerous occasions in the past few months, the underlying problem at the moment appears to be as much about the lack of demand for credit as it is about the supply of credit.

“The most recent data from the Banking and Payments Federation Ireland showed that mortgage approvals are on the rise but the stricter lending rules from the Central Bank as regards house purchases will likely have a negative impact on borrowing.

“And even with a strong pick-up in economic activity, overall bank lending is forecast to remain fairly subdued in 2015, and well below what Ireland needs for sustainable growth in the long-term,” Mr McQuaid said.

Mortgage lending, which accounted for almost 85% of total household loans in July, declined at an annual rate of 2.6% with lending for other purposes falling 3.5%.

In total, loans to Irish households declined at a rate of 2.8% when compared to the same period last year.

Despite recent reductions, however, households here remain mired in debt to a greater degree than their peers in almost every other European country.

According to the most recent pan-European figures covering the first quarter of the year, the country’s households owed a combined €154.6bn, or €33,530 per citizen.

Only their Danish and Dutch equivalents carry greater burdens.

The figure is, however, down by €3.7bn from the peak levels of 2010.

Yesterday’s Central Bank release also showed Irish households’ willingness to save any extra funds despite the measly interest rates on offer.

Notwithstanding the record low rates, deposits rose by €673m in July and are now up by more than €2bn in the 12 months to the end of the same month.


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