Unintended consequences downstream from Central Bank warning on lending

Cantillon: intervention will increase pressure on wages and push up inflation

The Central Bank: appears alive to its responsibilities. Photograph: Matt Kavanagh

The Central Bank: appears alive to its responsibilities. Photograph: Matt Kavanagh

 

The problem of unintended consequences bedevils policy-making at the best of times, but is particularly acute in a crisis. Fixing a problem in one part of the economy may inadvertently create or accentuate a problem elsewhere.

And so it is with the Central Bank’s warning that it will impose mortgage lending limits if the banks do not adopt a prudent approach. There is already evidence that the banks are lending at the edge of what might be considered safe salary multiples, with some banks offering up to 4.5 times salary.

Another notion that we became familiar with during the crash is at play here, namely perverse incentives. Higher property prices feed directly into the health of a bank’s balance sheets and capital ratios. Not only that, new mortgage lending is pretty much the most profitable type of lending banks can undertake right now, according to Merrion Capital.

Thus the banks find themselves in a bind. Their short-term interest is served by helping drive up house prices, although their long-term interest is to not have another property bubble. It is in situations like this that the regulator has to step in, and the Central Bank would appear to be alive to its responsibilities.

But of course, it does not end there. People still need to buy houses and the limited supply will keep prices up. Thus the unintended consequences of the Central Bank’s putative intervention will be to increase pressure on wages and push up inflation. Not necessarily a bad thing, but not without unintended consequences of its own.