Central Bank warning on aid for those in mortgage difficulties

THE GOVERNMENT must strike a balance between helping mortgage borrowers who are in arrears and avoiding further damage to Ireland’s banks and public finances, the Central Bank warned yesterday.

The inability of many borrowers to repay their loans was a “concern for policy”, the Central Bank said, as measures to assist households in difficulty could have knock-on consequences for the banks’ ability to meet new capital requirements. The Government is pumping money into five lenders in the hope that stronger banks will assist in the recovery of the economy.

“The aim here has to be to find approaches that assist them without damaging the newly recapitalised banks or putting a significant extra burden on the public finances,” Central Bank assistant director of general economic services Maurice McGuire said.

The comments follow Bank of Ireland and EBS building society moves to increase mortgage rates. Bank of Ireland increased variable rates for owner-occupiers by half a percentage point and raised fixed rates for new customers. EBS raised its standard variable rate by 0.6 points.

Mr McGuire said the pressure on borrowers resulting from higher mortgage interest rates would have “some impact” on its economic projections, but this impact would be limited. Recapitalisation plans for the banks have already taken into account higher levels of mortgage distress and mortgage fraud, he said.

The Central Bank official added it was “a normal part of the commercial process” that banks would seek to pass on the higher cost of wholesale funds to customers.

Bank of Ireland’s rate hikes were announced one week after its chief executive Richie Boucher said defaults on mortgages in Ireland had not yet peaked.

Unemployment will remain high in 2011, despite a return to growth in the economy later this year, the Central Bank forecast in its latest quarterly bulletin. This will extend the risk of mortgage defaults, it cautioned. Its forecasts suggest there will be a muted jobless recovery in the Irish economy. It expects the economy to stop contracting in the second half of this year and predicts it will grow over 2011 as a whole.

However, the unemployment rate will remain above an average of 13 per cent in 2011 because much of the initial improvement in the economy will be due to a gradual recovery in export sectors that do not generate high numbers of jobs.

Mr McGuire said it “may take a while” for renewed growth to generate employment. The average unemployment rate in 2011 is forecast to be 13.2 per cent, compared to 13.7 per cent this year. “It’s not down very much and that’s just being realistic about it,” he said.