Governing hand: Philip Lane takes charge of Central Bank in recovering economy
Interview: Mortgage limits may go up or down but the new era of credit control is here to stay, says governor of the Central Bank Philip Lane
Philip Lane at the Central Bank: ‘The first and foremost point to make is that these rules are part of a new vision for how the European financial system should operate.’ Photograph: Dara Mac Dónaill
Only six weeks have passed since Prof Philip Lane took command of the Central Bank. Moving from Trinity College Dublin down the street, he did not have far to travel. After 20 years in academic economics, the new governor sees this as a natural transition.
“The tradition of the world I was in, in terms of the Harvard economics background, is that very definitely there’s a lot of mobility between academia and public service. So I’d view it as not uncommon for someone like me to make that move,” he says.
Lane (46) succeeded another Trinity academic, Prof Patrick Honohan, at the Central Bank. Regarded as an intellectual powerhouse with an international reputation in the world of economics, his appointment to a post held for decades by top civil servants all but copperfastened the principle of selecting an outsider to run the institution.
First impressions? “I’m reassured by the dedication and commitment of the staff I’ve been meeting. Beneath the surface of the Central Bank, there’s a lot going on. There’s a lot going on because the Central Bank has a very wide mandate.”
This is true. The bank’s many duties include oversight of the banking and insurance sectors, mortgage lending and consumer protection. Its euro zone responsibilities are legion, given the ever-expanding role of the European Central Bank (ECB) in Frankfurt. Lane now occupies the Irish seat on the powerful governing council of the ECB.
The new governor is sitting in the seventh floor of the Irish bank’s Dame Street headquarters, a building it will vacate a year from now for a new office complex on North Wall Quay. The move of 1,200 staff ranks high on Lane’s agenda, as does a review of the bank’s organisation. A new deputy governor will be appointed this month in succession to Stefan Gerlach, completing the changeover at the apex of the bank.
These are largely management issues. At the policy level, the bank has been embroiled in controversy over mortgage lending restrictions introduced a year ago. In addition, caps on public pay have prompted difficulties with the retention of staff in the bank’s regulation division. Separately, a long Central Bank investigation into the collapse of Irish Nationwide Building Society may lead soon to public hearings with former leaders of that institution.
Lane has met Minister for Finance Michael Noonan on two occasions since the Minister nominated him for the post in November.
Citing anxiety about supply constraints in the Dublin housing market particularly, Noonan himself intervened in the autumn to call on the bank to review caps on mortgage lending to first-time homebuyers.
Public utterances from the bank suggest it is not keen to dilute the rules. But what does Lane think?
“The first and foremost point to make is that these rules are part of the new vision for how the European financial system should operate. It was not an arbitrary decision to introduce these rules,” he says. “One of the main conclusions from the financial crisis – globally now – is that it is hard to see how you can prevent credit booms without using some type of credit control policy. That’s even more true inside a currency union when you don’t have a national interest rate policy.
“But even when you do have an independent currency, you see other countries – like the UK is doing it, Sweden is doing it – [where] there is basically a conclusion that the interest rate policy is too crude a tool to deal with credit booms. You need some versions of credit control policy.”
Lane’s core message, therefore, is that the new regime is here to stay.
“The case for having rules is very robust, and, again, if these rules had been in place in the mid-2000s, a lot of the problems would have been mitigated,” he says.
Still, he says the bank will review the operation of the caps this summer when it has more data to hand. Although Lane makes clear that the bank would vary the rules if it sees fit, he stresses that changes could be made “in either direction”. This means the rules could be tightened or loosened.
“It’s important to say that,” Lane says. “I think the Central Bank has committed that if we see strong reasons to vary the rules, we’re perfectly open-minded about that, but these should be seen as basically a permanent feature of the system,” he says.
“Once these rules are in, then it is, I think, appropriate to analyse the impact of the rules and also to be suitably open-minded about whether these rules need to be revised from time to time.
“I think it’s generally agreed that the rules really only started to kick in from summer 2015 because so many mortgages in the first half of 2015 would have been pre-approved. So by summer 2016 a year of data will have come in on how this has affected the allocation of mortgages in Ireland. So the Central Bank will be receiving from the mortgage banks the details of how these rules have been implemented.
“I would expect in the second half of 2016 for the Central Bank to release its analysis of what we are seeing in the market. So that’s what I think you can expect to see. And I think it’s an important responsibility of the bank – having introduced these rules – to be as rigorous as possible in interpreting the impact of these rules.
“It’s not the case that the Central Bank picked the most severe rules. Those rules can be adjusted, recalibrated, but it’s not the case that we’d expected to see [this reviewed] every quarter.”
Moreover, Lane insists it would be wrong to see every change in the housing market in the past year as a consequence of the rules. He adds, however, that many developments since have been consistent with the bank’s analysis.
“The Central Bank did expect that there would be a shift towards more people renting. I think it’s not surprising that there’d be a shift from a softening of Dublin house prices to an increase in house prices in the wider commuter belt.
“So these are partially the effect of the rules, but partially also we have a very strongly growing economy.”
Asked whether the banks themselves have made their views known to him, Lane says he has not had any direct lobbying from the banks or anyone else.
So when should the outcome of the review be expected? In the second half of the year?
“If a year of data has come in by the summer, then it’s going to take some time to analyse, but the Central Bank will be as prompt as possible,” Lane says. “There is a vacuum. I agree that the Central Bank needs to be prompt and transparent in sharing its analysis of the impact.”
On pay in the bank , Lane says national central banks are under pressure due to the creation of a single European bank regulator.
“The expansion of the single supervisory mechanism (SSM) [means] there’s competition for talent between the national central banks across Europe and the SSM in Frankfurt,” he says.
Asked where the matter now stands, Lane says Honohan exchanged letters with Minister for Public Expenditure Brendan Howlin. “Everyone agrees that fiscal discipline needs to be maintained, so that there cannot be a general departure from fiscal discipline in terms of public sector pay. On the other hand, it can be possible to deliver a flexible pay structure without necessarily breaking fiscal discipline.”
Of Irish Nationwide, Lane says the presumption is that the inquiry will continue after a High Court ruling this week which rejected an attempt by former society chief Michael Fingleton to block the process. “Of course, it’s not impossible that there might be appeals.”
On whether it is all a little tardy, Lane says the passage of time is not so long as to make it irrelevant to pursue the matter. “I would say the Central Bank here has built up its enforcement division, but it’s fair to say there were other priorities in the first years of the crisis.”
Asked if enforcement might be faster on his watch, Lane says the process has moved quickly “in other dimensions”. It’s not the case, therefore, that it has simply lagged for years and years. “The crisis was such a large-scale and a complicated beast that that is not the benchmark for the speed of enforcement.”
Lane’s appointment coincided with a decisive turnaround in Ireland’s recovery, a big improvement in the public finances and moves by the ECB to boost its quantitative easing (QE) programme.
The governor, whose background is in international macroeconomics and finance, says Ireland is in the “intermediate” phase of its progression from crisis. He also notes a high degree of uncertainty in the global economy.
What, in his view, are the big lessons from the crash? And have they been learned by the Irish people and Irish politicians?
“I think the lesson from the crisis, which applies now just as much as in the height of the boom, is that it’s important to welcome good economic developments,” Lane says. “It’s important to celebrate increases in employment and so on, but it’s also important to be very aware that the Irish economy, it’s a small economy and it’s extremely plugged into the global economic and financial system. What that means is that it can go through long periods of very good growth but it’s also vulnerable to reversals.”
His conclusion is clear. More important than making forecasts for what one thinks will happen is to be prepared to be wrong. This goes for people in their own lives, just as it does for the banks and the public authorities .
“Banks have to be prepared for disappointing outcomes,” he says. “The Government has to be prepared for disappointing outcomes – and households, equally, in terms of their plans for how quickly their incomes are going to go up over time, and so on. You might be optimistic, but you probably should be organising your financial affairs recognising that reverses can happen.
“Hopefully, future reverses will not be on the scale of what we saw in 2008, and essentially this goes back to the shared responsibility between the Central Bank and the Government to do what it can.”
For the Government, he adds, this means it must build in fiscal flexibility to deal with downturns. “It means when times are going well that you reduce the public debt [and] you build up the surpluses so that when the downturn comes you can relax, you can have a fiscal injection to help the economy to get through a crisis. That’s important, but that goes hand in hand with the Central Bank pursuing a similar philosophy.”
Lane is a big supporter of Europe’s new fiscal rules, but he says the regime should be implemented in a smart way, with flexibility where appropriate. “In the Irish context, I think it’s very important to have the anchor of respecting that fiscal framework. The most important point to make there is the remarkable improvement in the Irish fiscal situation. Over the course of the crisis – with a lot of sacrifice by the Irish population, a very severe fiscal austerity – the kind of fiscal adjustment so far has been remarkable.
“I think the challenge for the political system is to recognise that the flipside of having the flexibility to have a fiscal stabilisation during recessions is to build up reserves during good times.”
This leads inevitably to the Irish Fiscal Advisory Council’s criticism of the October budget. At issue was a big boost to supplementary spending in 2015, which the council saw as a deviation from prudence.
“I’m sympathetic to the idea that we are currently in an intermediate phase where a range of views can be held about where fiscal policy should be positioned,” says Lane. “The range of views between what the fiscal council is saying and what the Government is doing is actually quite narrow. It should not be overinterpreted.”
Still, he won’t say where he himself is positioned on that range. The relevant dialogue is between the council and the Government, he says. “I would take the view that the fiscal council has the authority now to hold the Government to account on its implementation of fiscal policy.”
Then there is the looming election, in which discussion is already concentrated heavily on the prospect of tax concessions and the like. Does Lane believe the debate takes full account of the challenges facing the Irish economy?
“Politicians, through their work in government or Oireachtas committees, have no shortage of information about the challenges facing Ireland,” he says. “I’m sure all politicians are very aware of the implications of an ageing population for pensions, for healthcare. Right now, of course, Ireland has a lot of young people. In the education system, there’s obvious demographic pressures also.”
Although Lane reckons that political parties are highly aware of these issues, he goes on to note the ever-present burden of Ireland’s post-crisis debt. “It’s important to say that, now, interest rates are low, including the interest rate the Government has to pay on its debt.” That brings obvious benefits, but Lane observes that “superlow” interest rates are not necessarily a permanent feature of the world.
Outlook for interest rates
Of course, Lane’s ECB role means he has greater insight than most into the outlook for interest rates. He insists, however, that there is no “mysterious strategy” through which the ECB interprets the world.
“There’s a high level of common understanding about the current situation in Europe,” he says of policymakers, private sector analysts and academics.
His first ECB rate-setting meeting in December came as the bank expanded its bond-buying programme. But financial markets were not impressed, dropping even as the bank’s press conference continued.
The response that day was not the decisive market judgment, he says. “It’s still the case, relative to the mid-October meeting, that there’s been a significant loosening of monetary conditions.”
One way to assess the ECB move is to recognise that it has made quantitative easing more routine, he adds. “There was big debate in 2014 about the expansion of QE to include sovereign purchases. So if you see an instrument that works, and with the evolution of data in 2015, I think the position was that more was needed for the ECB inflation target to be hit but at the same time because the European economy is growing . . . that essentially the extent of the recalibration would be of this order.
“But it’s important to say that no door has been closed. If the data flow over the next number of months is that more needs to be done, more can be done. In other words, it’s now becoming more of a normalised instrument that every number of months the analysis can be updated and that if more needs to be done, more can be done.”
CV: Philip Lane
Name: Philip Lane
Position: Governor, Central Bank of Ireland
Career: Lane held the prestigious Whately chair in political economy at Trinity College Dublin from 2012 until his appointment to the Central Bank in November 2015. He ran the economics department at Trinity for 12 years. In March 2015, ECB president Mario Draghi appointed him chairman of the advisory scientific committee of the European Systemic Risk Board. In the mid-1990s, he was assistant professor of economics and international affairs at Columbia University.
Education: Lane grew up in Blackrock, Co Dublin. He attended Blackrock College and was the top-ranked economics student when he graduated from Trinity College Dublin with first-class honours in 1991. He has a PhD from Harvard University.
Family: Married to Orla, they have two school-going children.
Pastimes: He is an avid reader, does a “limited amount” of running and supports three soccer teams: Liverpool, Ireland and Beechwood in Ranelagh, Dublin.
Philip Lane on . . .
The Central Bank’s mortgage rules “I think the Central Bank has committed that if we see strong reasons to vary the rules, we’re perfectly open-minded about that, but these should be seen as basically a permanent feature of the system.”
Ireland’s exposure to the global economy “It’s important to celebrate increases in employment and so on, but it’s also important to be very aware that the Irish economy, it’s a small economy and it’s extremely plugged into the global economic and financial system. What that means is that it can go through long periods of very good growth but it’s also vulnerable to reversals.”
The ECB’s QE programme “It’s important to say that no door has been closed. If the data flow over the next number of months is that more needs to be done, more can be done.”
The bank’s enforcement policies “The crisis was such a large-scale and a complicated beast that that is not the benchmark for the speed of enforcement.”