Credit bender may yet end in bad hangover

Analysis: Larger-than-expected ECB rate hikes may be factor that brings Irish spending spree back under control writes Marc Coleman, Economics Editor

A builder is reputed recently to have described the Irish economy as a party that is going to end in a bad hangover. The only question, he suggested, was whether it would end at 3am or 5am.

Another wag once described the role of central banks as taking away the punchbowl before the party gets out of hand.

The analogy of a teenage party that's totally out of control might not be the most accurate to describe the Irish economy, but if the Central Bank's latest credit statistics are anything to go by, it's not far off.

As of March, residential mortgage growth was running at 29 per cent, with non-mortgage lending rising by a comparable amount. In that month alone, credit card spending in the State jumped by almost €1 billion. Whether to buy houses, cars or just party, the Ross O'Carroll Kelly generation is borrowing like never before.

Like shocked parents, the Central Bank has stumbled in on this debauchery of debt. It has warned us to stop, but we don't listen any more because they're boring. Since we joined the euro, there's nothing it can do anyway.

The European Central Bank (ECB) is a bit different, more police than parents. They're boring, too, but they can take the fun away any time they like. After they raised interest rates last December and again in March, you'd think we'd listen. But maturing SSIAs are about to inject more liquidity into the system. What will it take to calm things down?

Yesterday didn't just bring the latest credit statistics, but also euro-zone inflation statistics. According to the harmonised index of consumer prices (HICP), euro-zone inflation hit 2.4 per cent in April on the back of higher oil prices.

In the wake of March's governing council meeting, ECB president Jean-Claude Trichet ruled out a rate hike in May. As noted in this week's consumer sentiment survey, consumers took this as a positive sign. The police may have knocked on the door, but apparently they have only issued a caution and we can turn the music back up.

Not so. Last week saw three ECB governing council members warn of significant rises in interest rates in the coming year. Added to a rebound in German consumer confidence, yesterday's HICP data strengthen the case for more, rather than less monetary tightening.

And with a raft of first-quarter GDP numbers due in two weeks, the picture of the euro-zone's economy may strengthen to the point where the ECB regrets having ruled out a May hike.

The ECB is also worried about lending growth in the euro zone. As is happening in Ireland, that growth may continue unabated in the euro zone, despite two previous rate hikes. If that happens, and if May's economic growth statistics are strong enough, then the ECB may conclude that small measures are no longer enough to ensure good behaviour.

Bank of America economist Holger Schmiedling said yesterday that there is a 35 per cent chance of the ECB raising interest rates in June by a half a percentage point.

If we are due a hangover - then whether it comes at 3am or 5am - the only important question is: What time is it now?