Global trade and geopolitical tensions to hurt domestic demand as Ireland 'particularly exposed' to external shocks
Rising geopolitical tensions, shifting trade policy and growing economic uncertainty have increased the risks facing Ireland's financial system, which is "particularly exposed" to recent external events, the Central Bank has warned.
Publishing its first Financial Stability Review of the year on Wednesday, the regulator said that Ireland's small, open economy, which is highly reliant on foreign direct investment, was especially vulnerable to recent trade tensions.
However, it stated that the economy was entering this new period of uncertainty from a position of strength, with households, businesses, and the domestic banking system providing a buffer against adverse shocks.
It noted that the current uncertainty underlines the importance of capital buffers, continued prudent risk management, and building financial and operational resilience.
Short-term impacts
Speaking at the launch of the review, Central Bank governor Gabriel Makhlouf said it remains unclear where US tariffs and countermeasures might settle over time, leaving markets vulnerable to sudden adjustments.
'In the short run, the main channel through which these developments are likely to affect the domestic economy is uncertainty as well as a reduction in external demand," the governor said.
"There has already been some softening in consumer sentiment, and industry engagement points to cautiousness amongst companies, at least for now, in terms of new investments.'
Over the medium-term, Mr Makhlouf said: 'Any reduction in activity by US-owned multinationals, particularly in economically concentrated and trade-sensitive sectors such as pharmaceuticals and ICT, could affect employment, tax revenue and investment.
"The economic effects of any such shifts are subject to significant uncertainty and would materialise over a longer horizon.
"From a financial stability perspective, any material slowdown in domestic economic growth could raise credit risks for Irish banks and negatively affect market sentiment towards the Irish sovereign.'
Given the ongoing uncertainty, Mr Makhlouf said it was important to be prepared for potential macro or market shocks, and that the financial system is both maintaining and building both financial and operational resilience for the period ahead. Cyber and climate-related risks continue to be important sources of adverse shocks, the governor said, adding that ensuring resilience remains a key focus of the bank's supervisory and macroprudential work.
"In that context, we are also confirming today that the Countercyclical Capital Buffer rate, a tool used by the Central Bank that requires banks to set aside financial resources to act as a shock absorber, will remain at 1.5%," Mr Makhlouf said.
On financial markets, the governor said the global market volatility in April led to higher liquidity demands for certain groups of investment funds based in Ireland, similar to patterns globally, but the market continued to function.
'Given the large, internationally-focused non-bank financial intermediary (NBFI) sector in Ireland, we have dedicated a part of today's report on how different segments of the sector responded to the heightened volatility that we observed in April.
"At a global level, structural vulnerabilities in parts of the sector mean that the behaviour of non-banks could amplify future market stresses. This underscores the importance of continued progress in strengthening the regulatory framework for NBFI, including at a multilateral level.
Future challenges
On the broader outlook, Governor Makhlouf said the fragmenting geo-economic relationships and transitions around demographics, climate and digitalisation present clear challenges but also opportunities for Ireland and Europe.
'The Central Bank is engaging proactively with the simplification agenda without compromising on the standards required to deliver on our mandate and maintain resilience across the domestic financial system," he said.
"Harnessing the power of the Single Market, moving towards a genuine Savings and Investment Union, and forging new trade links can 'have the potential to contribute towards domestic and European financial stability, while also fostering long run economic growth."
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