Wednesday 12 December 2018

Top Irish officials bullish on threat of rate rises

European Central Bank HQ in Frankfurt
European Central Bank HQ in Frankfurt

Colm Kelpie

Any negative impacts from the winding down of the European Central Bank's massive bond-buying programme will be limited, a high-level State group has said.

That's despite a risk assessment published last summer in which the Government claimed an end to quantitative easing could push up borrowing costs given the scale of our public debt.

But the Financial Stability Group, which is made up of senior officials including the head of the Department of Finance, the NTMA and Central Bank Governor Philip Lane, has looked at the effects of higher interest rates due to QE tapering, and the potential effect on asset prices, and believes there will be a limited impact, assuming the process is "orderly".

The Department of Finance also believes that a one percentage point rise in interest rates by the ECB would cut GDP here by 1pc after five years, while employment would be 0.7pc lower.

The ECB announced in October it was going to cut its massive bond-buying programme to €30bn a month from €60bn, as of January. But it extended the scheme's lifespan by a further nine months, signalling to investors that despite strong growth, work must continue as inflation remains low.

Credit ratings giant Moody's has singled out Ireland as one of the eurozone's chief beneficiaries of the ultra-loose monetary policy regime that has boosted asset price in the region.

Finance Minister Paschal Donohoe said the ECB programme "cannot last indefinitely". "The Financial Stability Group, comprising senior management of the Department of Finance, the Central Bank and the NTMA, acts as the primary vehicle for senior management in the constituent institutions to assess and manage the key risks to financial stability," Mr Donohoe said.

"One of the risks discussed in 2017 was the effects on financial stability of higher interest rates due to the unwinding of QE and by extension the potential effect on asset prices. The Group's view that any negative impacts of winding down the QE programme are expected to be limited, assuming the process remains orderly."

The minister was responding to a parliamentary question from Fianna Fáil's finance spokesman Michael McGrath.

Mr McGrath asked if a detailed analysis had been carried out within the Department of Finance, NTMA, or Central Bank of global asset values and its impact on the economy and Government debt and the impact of the ECB reducing and/or reversing its quantitative easing programme on asset values, the economy and Government debt.

Mr Donohoe said the NTMA had been contemplating the end of the ECB's QE programme since it began in March 2015.

"Through taking pre-emptive action over the past three years, it has significantly improved our debt redemption profile and lowered our debt interest bill. At end-November 2014 the amount of Government bond and EU-IMF Programme-related debt that was scheduled to mature over the three year period 2018-2020 was some €60bn.

"Through the early repayment of IMF and Swedish and Danish bilateral loans, together with the early buyback and switching of near-term maturing bonds for longer maturity bonds, that figure has been reduced to circa €44bn currently."

Mr Donohoe also said this year's €8.8bn bond maturity in October has been pre-funded, with exchequer cash balances over €17bn at the end of January.

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