Governor Makhlouf at the Finance Committee now

Brendan Burgess

Brendan Burgess

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Oireachtas committee meeting live stream

Live stream of public Oireachtas committee meeting in committee room 3
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Here are his comments on interest rates extracted from his opening statement

As interest rates are the primary tool to fight inflation, my colleagues on the ECB’s Governing Council and I started raising our key policy rates in July last year. These are now at 2 per cent. Our primary mandate is price stability and we are determined to achieve our inflation target by aligning aggregate demand more closely with aggregate supply conditions in the euro area economy as a whole.

Raising the policy rate also signals our commitment to price stability. It sends a clear message that we will not allow inflation to stay above 2 per cent and helps to contain inflation expectations, guarding against the emergence of self-reinforcing inflation dynamics and tackling the risk of a persistent increase in inflation expectations.

We need to continue to increase rates at our meeting next week – by taking a similar step to our December decisions – and also at our March meeting, although our future policy decisions need to continue to be data-dependent given the prevailing uncertainty.

To sum up, inflation remains far too high and interest rates will have to rise significantly at a steady pace to reach levels sufficiently restrictive to ensure a timely return of inflation to our 2 per cent medium-term target. Bringing inflation back to target is essential for the wellbeing of our economy and community.

...

While some mortgage customers are experiencing directly the effects of our interest rate decisions, there is substantial resilience across the mortgage market.

Lower levels of indebtedness, a gradual shift towards fixed rate borrowing, pandemic savings and substantial housing equity, are all ensuring that the mortgage market as a whole has significant capacity to absorb shocks.

Even in the SME sector, where cost increases will severely tighten profit margins for many, indebtedness has fallen continually for a decade, reducing the risk of macroeconomic spillovers between the financial sector and the real economy.
...

Interest rates and the Irish mortgage market

Let me turn to the impact of interest rate rises on the Irish mortgage market. Part of the transmission of monetary policy – essential to ensure that inflation returns to target – is what we now see happening to mortgage rates.

Increases in the ECB policy rate are transmitted over time to households and firms’ borrowing rates via the financial sector. Lenders and credit servicing firms in Ireland have increased rates on their mortgages in recent months.

Retail banks – who provide 84 per cent of all principal residence (PDH) mortgages – have to date increased fixed rates for new or switching customers, and have not increased their variable rates. Non-bank lenders and servicing firms have raised variable rates, including some rates at the higher end of the market.

And of course customers on tracker products have seen their rate increase automatically in line with the ECB rate. The impact of these rate increases on borrowers will depend on a combination of the rate increase itself and the financial and personal circumstances of the individual borrower, be they a private individual, a small business or a large corporate body.

We have been clear with the firms we regulate that they need to be proactive in supporting their customers to navigate these changes.

We will continue to engage actively with regulated firms on their approaches to increasing interest rates and managing the impact of inflation, and how they support their customers in line with the regulatory framework and our expectations.

As you know, the same regulatory protections apply whether a borrower’s loan is with a bank or with a non-bank lender or servicing firm.

The Central Bank does not have a statutory role in approving the rates that mortgage lenders charge on their loans. These are commercial decisions for the lenders themselves but we do expect firms to:

  • Have the resources and arrangements in place to assess applications from existing and new or switching borrowers in a manner that is timely and based on prudent lending standards applied consistently across all applicants;
  • Have fit-for-purpose arrangements in place to anticipate and deal with customers in or facing arrears. This includes cases where consumers may face arrears due to an increase in the interest rate on their mortgage, while recognising that with increasing costs of living driven by inflation, this is just one factor currently affecting people’s repayment capacity; and
  • Proactively assess the risks and consumer impact that commercial decisions, including rising interest rates, may pose to borrowers and have an action plan in place to mitigate such risks.
Conclusion
 
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Pearse Doherty:

Your comments will set alarm bells ringing

I have one customer who is now paying €400 a month more on their mortgage - that will rise to €5,000 a year or more based on your speech.

Do you expect the banks to pass on rate increases, as the reason for doing it is to target inflation.

Makhlouf: We recognise why we are increasing rates. And you TDs need to help us to communicate it.

We expect monetary policy to be transmitted to the whole economy.

But it's up to the individual banks to decide.

Different banks have taken different decisions , and different again to the banks in other parts of the EU.

Pearse: If the banks don't pass on these cuts, given the levels of cheap deposits. Are they acting contrary to ECB policy


I find it impossible to tell a constituent that he has to pay more interest to combat the rise in energy costs.

Makhlouf: Inflation is more broadbased than Putin's decisions

How the banks will respond will vary.

If there was no response for a long time, that would be concerning.

Colm Kincaid
We are interested in mortgage rates but we are looking at other forms of credits .

What we have done to get the system ready

1) Affordability
2) Switching

We want the banks to be better resourced to deal with mortgage arrears. More innovative solutions need to be found.
Arrears and pre-arrears.

Pearse

Do you accept that arrears will rise.

Kincaid: Yes

But the system is ready.

But we have introduced a range of measures to deal with switching...

Pearse

But a lot of people can't switch - we have 100k family homes have been sold to vulture funds

WE were told by you and the government that "don't worry about it, you are protected"

But these guys are being charged 7%

The vulture funds offer no options. They don't even engage.

There is no fixed rates. There is no split . There is warehouse. There is no reduced interest rates.
There is "pony up or else"
How does the CCMA apply when they try to engage.

Ronayne

There is a special onus on companies to have a range of measures in place
We wrote to the CEOs of all the banks and funds telling them how we expect them to behave
We do not have a role in setting prices.

We have seen the vulture funds increase rates.
We want them to analyse the effect of these on customers


What we have seen in the long term arrears is that the non-bank firms are dealing best with long term arrears

We want to see how they

We very much agree with the concerns of the Deputy.

We have seen these funds not rolling out increases to customers who couldn't afford them.

Pearse
I am glad you have seen it. I havn't . It must be on the fringes.

The cost of these mortgages have gone up by multiples

one indiviual went to ptsb and he was told he was wrong. He went to the Ombudsman and won his case. And 200 other customers were fixed.

Because he was in an arrangement, his loan was sold off.
Next week he is going to be paying 7% to a vulutre fund.

He should be restored to his position before.

This cohort should never have had their mortgages sold to vulture funds.
They are now facing a secondary effect from the tracker mortgage scandal.

Ronayne
Switching. They should be looking at switching. See can they choose to switch and can they have the capacity to switch.

We then need to understand , why they can't switch and understand the strategies the lenders have in place to deal with those people

Last year we made the banks put resources into switching.

Pearse
This is the Central Bank washing their hands of it.
The only reason this loan was sold because it was non-performing by your standards. His loan was sold on only because

You are putting the onus on him to switch. But it should have been on ptsb.
He is now out to the tune of €5,000 a year.

Makhlouf
it's unfair for you to say we are washing our hands on it.
We are making sure that all lenders meet the expectations of the Code.
We are trying to understand the impact on borrowers
I don't understand what reason ptsb had for selling these loans

We are focussed on this issue.
 
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Jim O'Callaghan (FF)

Is your policy of increasing rates working at present.

Makhlouf: Monetary policy works with a lag

O'Callaghan: How do you know the rise in rates is linked to the fall in inflation.

Makhlouf: (I didn't follow his answer but it's a weird question unless he explains that the causes of inflation are Putin related.)

The period of low interest rates is over.

O'Callaghan: something about 6%

Makhlouf: I would be surprised if they reached that level.
 
Ronayne
The suite of options is broad
Reduced rates
Discounted rates

There is no substitute for the banks doing borrower by borrower analysis.

We will engage with this issue until we believe that the work is done.

But recognising that we don't have a mandate to set prices.

Of the 113,000 borrowers with non bank lenders,
looking at those who have seen their rates increase - it's down to 30,000 who have seen a rate increase and 35,000 on trackers.

[This makes no sense to me. 50,000 may be on fixed rates, but their rates will increase when the fixed rate ends.]

We need to understand what the banks' solutions are.
 
Interesting discussion on Crypto now
Governor says it's a Ponzi Scheme
Regulating it might give it a credibility it does not deserve
But we also don't want to close down innovation.
Financial Stability risks are minimal
But we need to protect consumers - I am very concerned about the impact on some individuals
If it's unchecked it could become a financial stability risk.
Leaving aside the criminal use of it - I will leave that to the Guards.
 
Peadar Tobin

We have cost push inflation in the economy
So raising interest rates won't help

Vas (Deputy Governor)
There are supply side and demand side shocks

Tobin: Is there any analysis which shows how much is due to the supply side

Vas :
Irrespective of the price source - we try to make sure it does not become embedded in consumers' expectations and behaviours.
Monetary policy was very supportive of demand - over the last year we have reduced that.

Tobin: is cost push inflation - 30% of the effect?
It has significant policy implications
If it's mainly cost push, then interest rates won't help much but will cause unnecessary pain

Makhlouf: The drivers of inflation in the EU are very different from the drivers in the USA.

WE are not seeing it as cost push.
 
Now the Covid skeptic bit from Tobin

How did Covid restrictions affect interest rates?

Our restrictions were much longer than in other countries

OK, We did have a real illness

But monetary policy was

Is it fair to say that the Covid experienece has had a signficiant impact on inflation.

Vas: There was a big increase in demand when the economy reopened

Tobin: We want analysis of the Irish experience
We have suffered due to european policy imposed on Ireland e.g. low interest rates

I would like to know the effect Covid decisions - restrictions and increased money flow - had in Ireland.

If we go back to all the great plagues, there was massive increases in inflation afterwards.

Could you find this out
Makhlouf: We will do our best.
Vas: We have a lot of data - we will supply.
 
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Tobin
On vulture funds

The Code makes sure that they adhere to Irish

Is there any lever to stop them charging rates which are 3% or 4% higher than the main banks

Makhlouf: We don't have a role

Tobin: From a legislative position, that is a very weak position. Former governments forced the banks to sell their mortgages.

Can people switch out of a vulture fund?

Ronayne: All lenders must have a suite of options for borrowers who are facing payment difficulties. That is where we are focussed. It is more detailed and intrusive than other european restrictions.

There is no tiering in terms of regulation.

Ronayne: There are differences in pricing practices
Not all non bank have passed on the rate increases or the full rate increases.

We need to see the extent to which people are switching.

It's the same set of rules for someone who wants to switch from a bank and from a non-bank. A borrower from a non-bank seeking to switch gets the same treatment as someone who wants to switch from a bank.

Tobin: That is not exclusive from the two tier system
Do we have any data how many have switched from vulture funds.

The rules allow it, but the reality is that it doesn't happen.

Ronayne: We don't have that data
38,000 who are on SVR s are on the higher rate. That is where they have a very special duty to understand those borrowers and to factor them in to their engagment with lenders.

We expect them to review their product options to make sure that their loans are affordable.

Tobin: A woman rang me. Her mortgage rose from €600 to €950. How does she engage with you to make sure that her rights are implemented.

Ronayne: Their lender must engage with them. We have 400 mortgage intermediaries who could advise.
We get information from borrowers and we will take action if the lenders outside the code.
 
Marie Farrell (SF)

I see friends of mine discussing cryptos

In terms of Revolut

Some scam before Xmas - but that is a Garda matter

The main banks are reducing their services.

Is there time to ensure that Revolut has a physical presence here.

When people were scammed they could talk only to a chatbot.

Mahklouf
I won't discuss individual firms.

But as regards the physical presence.

As regards the operation of the single market, we don't introduce rules which contravene EU law

(I have to leave now.)
 
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