ESRI urges state to offload bank stakes faster, cuts growth forecast
The State should get rid of its stakes in the banks at a faster rate to foster competition and ultimately drive down mortgage interest rates, the Economic and Social Research Institute (ESRI) has said.
In its latest economic assessment, the think-tank questioned why there wasn't more competition in the Irish banking sector given the recovery in the economy. It also said that the political push to force the Central Bank to drive down interest rates was not the way to go.
Kieran McQuinn, ESRI associate research professor, speculated that it could be as much as a result of the state involvement in the sector, as the fact the market is dominated by two major players.
Asked if he was in favour of the Government's timetable for selling the banks, Mr McQuinn said: "If anything, I'd make it quicker.
"People will look at it and see maximising the return to the taxpayer, but the point that we're making is that because Irish firms and Irish households are facing higher interest rates in the market, there are also costs associated with that, which maybe people aren't focusing on," he said.
"If you think of the difference in the interest rate here versus other European countries, you can argue that a component of that difference is due to State involvement in the banking sector."
Meanwhile, the ESRI fractionally revised downward its growth forecast for the Irish economy this year, blaming a combination of weaker global trade and the uncertainty around Thursday's Brexit referendum.
The think-tank said domestic demand is now the chief driver of growth, with net trade actually acting as a drag.
Unemployment is expected to fall to 7.6pc by the end of this year, and could fall as low as 6.9pc or lower by the end of 2017.
Mr McQuinn also said that if this happens, and if the number of houses being built increases, the economy is at risk of overheating.
He said the Government may need to take money out of the economy next year, by running a surplus, to moderate it.
But the amount of houses being built is still far off what is required.
Around 13,500 houses are to be built this year, while that will rise to 17,500 for next year. But that's well off the need for 25,000 houses, the ESRI said.
Mr McQuinn also said that while net migration will be flat in 2016 - meaning the number of people moving into the country cancels out the number leaving - the trend will turn positive next year for the first time since the financial crash.
In terms of public sector pay, the ESRI said any future wage agreements needs to benchmark Irish unit labour costs with those of key comparator European economies.
"As a small open economy, we cannot afford to undermine the recent hard won competitiveness of the domestic economy," the commentary states.