Central Bank causes a stir

THE Central Bank is to meet banks and building societies to discuss lending and the state of the housing market.

However, any fears about an immediate move by the Bank to clamp downs on lending or increase interest rates have been dispelled when it insisted it was only meeting the lenders to "exchange information".

News of the meetings swept the" Dublin market early yesterday and caused initial consternation in the Government bond markets, sparking a sell off among domestic institutions. Players feared the Central Bank was telling the banks they must tighten up on lending.

Also affected by a sell off in the US bond markets following much stronger than expected 2.8 per cent rise in US first quarter GDP figures, Irish bonds fell sharply, pushing five year bond interest rates up from 7.38 per cent to 7.56 per cent. The US figures also sent share prices on

Wall Street sharply lower, with the Dow Jones closing down 76.95 at 5498.27.

Bankers confirmed that the Central Bank was not putting on the pressure to tighten up on credit growth or mortgages, but wanted to find out what the banks felt about the current credit boom.

Despite yesterday's figures showing 11.3 per cent credit growth in March from a revised 10.9 per cent in February, the market remains convinced that rate increases are not on the horizon.

In the borrowing figures, the £600 million increase in lending in March was predominantly advanced by the banks. Overdrafts were up £252 million in March and term loans rose by £247 million.

The Central Bank also said that official external reserves fell by £112 million in March. This was partly due to money the Central Bank used in foreign exchange intervention. "The interesting thing is that the Central Bank has become a net "buyer of the currency this year," said Dr Dan McLaughlin, chief economist at Riada Stockbrokers. "It seems that the policy is to let a rising currency take the strain rather than raise interest rates or tighten fiscal policy."

Most analysts were carefully watching mortgage lending and it came in above the rate of increase in recent months at 14.1 per cent up from 13.8 per cent in February.

Dr McLaughlin said that the second quarter consumer price index would be watched very closely for any signs of inflationary pressures.

The exchequer borrowing requirement for the first four months was significantly outside the Government's target for all of 1996. Ireland's end April EBR was £969 million. The 1996 full year target is £729 million or 2 per cent of GDP. Analysts said reducing the EBR must become a government priority.

Dr McLaughlin noted that the rise was "ludicrously" above target. He had expected a figure around £800 million. "There must be timing factors afoot," he said. "Also it seems to be on the spending side. It should be easier for the Government to bring spending back in line. It would be more worrying if the revenue number was struggling."