Set up rainy-day fund to avoid a crash, says Central Bank boss

IRELAND must build up a substantial rainy-day fund to ensure we don’t return to the misery of the economic collapse, Central Bank governor Philip Lane has warned.

The Central Bank previously faced criticism for limiting the amount of money people can borrow on a mortgage to 80% of the house price and 3.5 times their income, in most cases, but its chief defended his cautious actions, saying it was to avoid a repeat of the disastrous credit-fuelled housing bubble during the Celtic Tiger boom.

Now he wants the Government to be just as careful. He warned: ‘If fiscal buffers are not built up in good times, there is a risk of repeating the costly experience of past episodes by which economic downturns were amplified.’

When the credit bubble burst in 2008, house prices tumbled and unemployment surged as high as 16% of the workforce. It has since fallen to just 5.1%.

Despite strong house price growth since the crash, prices are still a fifth lower than their peak in 2007 which means the average house price now of just over €280,000 is about €70,000 less than its price then.

Governor Lane said: ‘From a policy perspective, it is clearly important to reduce vulnerability to crises by refraining from adverse macrofinancial patterns, such as persistently excessive credit growth or unsustainable fiscal imbalances.

‘In addition, especially since crises can arise even if domestic credit and fiscal conditions are in reasonable shape, it is also important to ensure the macrofinancial system is resilient even in the event of severe external shocks.’

House prices are climbing again at more than 12% a year but this is because of a lack of properties for sale, say experts. Governor Lane said: ‘With the prospect of further economic expansion during 2019-2021, a revision in the budget balance targets for 2019-2021 may be in order if a cyclically-appropriate policy stance is to be attained.’