Cen­tral Bank gives hard Brexit warn­ing

The Irish Times - - Business Today - COLIN GLEESON

Brexit re­mains the “main is­sue” fac­ing the econ­omy, and a dis­or­derly exit of the UK from the bloc would cause a “sub­stan­tial re­duc­tion” in out­put and em­ploy­ment, the Cen­tral Bank has warned.

The reg­u­la­tor, in its sec­ond macro fi­nan­cial re­view pub­lished yesterday, laid out its over­view of the cur­rent state of the econ­omy, with Brexit iden­ti­fied as the ma­jor threat.

“The main is­sue fac­ing the Ir­ish econ­omy is Brexit, and, in par­tic­u­lar, the pos­si­bil­ity of a dis­or­derly Brexit oc­cur­ring,” it said.

“A Brexit that pre­serves cur­rent trad­ing ar­range­ments would still see un­cer­tainty aris­ing ow­ing to the EU-UK ne­go­ti­a­tions that would re­main to be com­pleted af­ter March 2019.

Ex­change rate

“A hard Brexit would cause a sub­stan­tial re­duc­tion in out­put and em­ploy­ment. Re­cent years have seen sharp move­ments in the euro-ster­ling ex­change rate. Any fur­ther weak­en­ing of ster­ling would make Ir­ish ex­ports to the UK more ex­pen­sive. In the event of a hard Brexit, a weaker pound could co­in­cide with an in­crease on tar­iffs on those ex­ports.

“Sec­tors such as agri-food and whole­sale-and-re­tail are more ex­posed to the ef­fects of Brexit than oth­ers, while re­gions with a fo­cus on the UK mar­ket, such as the Border coun­ties, are more vul­ner­a­ble.

“Brexit could also dis­rupt the ac­tiv­i­ties of firms re­liant on im­ports from the UK.” Fur­ther­more, the reg­u­la­tor warned that a hard Brexit could lead to re­duced prof­itabil­ity for Ir­ish banks.

“Ir­ish re­tail banks’ ag­gre­gate bal­ance sheet in­creased marginally in the last 12 months,” it said.

“Loans books are heav­ily con­cen­trated in lend­ing to Ire­land and the UK, and mainly in­volve prop­erty loans.

“Any ad­verse eco­nomic con­di­tions aris­ing from Brexit could re­duce bank prof­itabil­ity, and have a ma­te­rial im­pact on the credit qual­ity of Ir­ish re­tail banks’ loan port­fo­lios. In the event of a hard Brexit, the abil­ity of Ir­ish re­tail banks to is­sue debt through the UK could be af­fected, and they may face op­er­a­tional and lo­gis­ti­cal chal­lenges is­su­ing debt in al­ter­na­tive mar­kets.”

In the in­sur­ance sec­tor “most firms” are likely to be af­fected by fi­nan­cial mar­ket volatil­ity.

The reg­u­la­tor iden­ti­fied other risks in­clud­ing volatil­ity in fi­nan­cial mar­kets and res­i­den­tial prop­erty price growth.

Cen­tral Bank deputy gover­nors Sharon Don­nery and Ed Si­b­ley said the reg­u­la­tor has been tak­ing steps to bring a “re­silience” to the econ­omy, but that Brexit was al­ready be­ing felt.

“In terms of the de­pre­ci­a­tion of ster­ling, the econ­omy is al­ready feel­ing the ef­fects of Brexit,” said Ms Don­nery.

Sharon Don­nery: econ­omy feel­ing ef­fects of Brexit

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