Published on Finfacts.ie, 31 October 2007

The Irish Central Bank reported today that the rate of expansion of private-sector credit (PSC)1 continued its downward trend in September, when the adjusted annual increase declined to 19.5 per cent, from 20.1 per cent in August.

This is the lowest annual rate since early 2004. Total credit advanced by banks actually rose by €8.4 billion over the month, but over half of this increase was not associated with domestic economic activity. Some €4 billion of the monthly change was accounted for by lending to non-bank IFSC companies, largely through loans to Special Purpose Vehicles (SPVs) to finance offshore financial transactions.

The rate of increase in non-mortgage credit also continued to decline, with an adjusted annual rate of 24.5 per cent in September, from 25 per cent in August. Lending in the term/revolving loans category remained strong, increasing by €2.6 billion in September. This category of lending has been very active since the start of the year, and has increased on average by €1.8 billion per month in 2007 to date. Lending in the Other Loans category increased by an unusually large €752 million over the month, but most of this was intra-company lending by a credit institution to a non-bank affiliate. The level of outstanding indebtedness on credit cards increased by €55 million over the month, leaving its annual rate of increase at 11.6 per cent, virtually stable for the past three months. While new spending on credit cards fell in September compared to August, there was a somewhat larger fall in payments received.

The pace of mortgage growth continued its steady decline in September. The pattern since January of an average monthly decline of around 1 percentage point in the annual rate of increase was again evident in September, when the adjusted rate fell to 16.1 per cent from 17 per cent in August.3 Similar to 2006, during which September recorded one of the lowest increases in residential mortgages (inclusive of securitised mortgages), the monthly rise of  €1.2 billion in September 2007 was the second lowest so far this year. The change in residential mortgages during the first three quarters of 2007 of some €12.7 billion was nearly 30 per cent less than during the same period a year earlier.

There were mixed movements in market interest rates in September. The overnight rate fell by 13 basis points, while the 3-month rate, which has maintained an unusually large average margin of 70 basis points over the ECB’s main refinancing operations (MRO) rate since liquidity pressures emerged in mid-August, rose by 5 basis points (see chart). Funds provided by the Bank as part of the ECB’s monetary policy operations rose by €3.7 billion in September, to €23.8 billion, with the decrease in main refinancing operations of €1 billion being more than offset by an increase in longer-term refinancing operations of €4.7 billion. The euro reached a new lifetime high against the US dollar in September, when it appreciated by 3.5 per cent over the month. The euro also appreciated by 2.8 per cent against sterling and by 2.7 per cent against the Japanese yen. Exchange rate movements resulted in a 0.9 per cent increase in Ireland's nominal harmonised competitiveness indicator (HCI)4 from 107 in August, to 107.9 in September.

Private Sector Credit
Total lending by credit institutions in Ireland to non-Government Irish residents increased by €8.4 billion, or 2.4 per cent, in September to €360 billion. Just over two-thirds of the increase was euro-denominated lending. Lending to non-bank IFSC companies rose by €4.1 billion over the month.

Components of Private-Sector Credit
The changes in the main PSC loan categories on credit institutions’ balance sheets in September were as follows:

• Term/Revolving loans were €2.6 billion higher;
• Residential mortgages (unadjusted for securitised mortgages) increased by €1.4 billion;
• Other mortgages rose by €243 million;
• Loans up to and including one year expanded by €2.9 billion; and
• Overdrafts increased by €654 million.

Money Supply
Credit institutions in Ireland accounted for €228.8 billion of the euro-area’s broad money supply (M3) in September, a monthly decrease of €6.3 billion, or 2.7 per cent. The annual rate of increase fell to 18.2 per cent, from 29.1 per cent in August. A large fall in debt securities with up to two years maturity of €4.7 billion was accompanied by a fall of €1.5 billion in money market fund shares/units. The outflow from money market fund shares/units mirrors aggregate euro area developments in August. The aggregate change in deposits was very small over the month.