Central Bank backs hard Brexit budget

A HARD Brexit on March 29 will push the State into a budget deficit once again, although extra spending to offset the shock would be justified, according to Central Bank sources.

A 4pc reduction in economic growth here, which is the Central Bank’s projection in the event of the UK leaving without a deal, would result in the budget swinging from a small surplus to a deficit of around 2pc of gross domestic product.

Despite this, the Central Bank is taking the view that the Government would need to respond to the economic shock and should not abandon its plans for investment in infrastructure which are in the budget for this year.

Even though regulators have worked to minimise risks in the financial system from any Brexit shock, there is still a large market risk that has been amplified by a recent rise in the value of the pound on moves to try and prevent a no-deal exit,

Those gains could be reversed unless there is a deal or an extension in negotiations within the next 29 days.

While Brexit is still the major risk to the economy on the Central Bank’s horizon, it is also keeping an eye on legislation affecting the mortgage market.

One of the reasons for Ireland carrying the highest mortgage rates in the euro area is legislation favouring borrowers in the event of default, which has limited the appetite of new lenders to enter the market.

The Central Bank is also believed to be sceptical about the value of proposals to end cashbacks, a measure proposed by Fianna Fáil’s Michael McGrath.

It thinks there are more serious issues to be addressed, saying that cashbacks should remain on the menu of mortgage options and that they were suitable for some classes of borrower.

A 4pc reduction in growth would see budget swing to a deficit of 2pc of GDP