"Beware the Ides of March" is an ancient warning against impending danger. Along with inclement weather, the new month brought cautionary economic messages yesterday from two significant sources, the European Central Bank and the Organisation for Economic Co-operation and Development.
On its own, the ECB's decision to increase interest rates does not spell trouble for the Irish economy. Indeed, it may have some moderating impact on the property market. By historical standards, the current pace of rate rises is modest and yesterday's decision will withdraw a relatively small amount of money from the economy compared to Government spending increases and the impact of SSIA funds. However, private sector credit is rising by 29 per cent per annum and the exposure of many younger borrowers to rate increases continues to grow.
The ECB's move is part of a trend that is likely to see further rate rises. Explaining yesterday's decision, ECB president Jean Claude Trichet noted the strength of lending growth in the euro zone. The rate of inflation remains moderate but is rising. Mr Trichet and his colleagues also feel that interest rates have been too low for too long, stimulating excessive borrowing in the euro zone. Meanwhile, improvements in Germany's economic performance are easing worries that higher interest rates could thwart the recovery of what is the engine of Europe.
The ECB's approach gives rise to two concerns in the Irish context. One is the prospect of mortgage holders cutting back on consumer spending, a key driver of the economy. The second relates to the impact on a property price bubble that is in danger of bursting.
The OECD issued a watered-down warning yesterday that our property market may be overvalued - in stark contrast to a draft version of its assessment obtained last year by The Irish Times which suggested the Irish property market was overvalued by 15 per cent. The Central Bank did not demur at that time but urged the OECD to avoid quantifying the extent of overvaluation so as "to avoid destabilising the market". However, that the acceleration of house prices has now reached a rate of 10 per cent warrants concern. The Central Bank's credit statistics show mortgage lending growing at a staggering 28.8 per cent. A worrying possibility has emerged that borrowers are using anticipated SSIA funds to obtain leverage from banks.
Against this background, it is to be hoped that yesterday's rate increase will have some moderating impact on both house prices and lending, giving rise to the prospect of a soft rather than hard landing. For if the property market was 15 per cent overvalued last summer, the situation has become more precarious in the meantime. In formulating a response, the Central Bank and the Government must analyse the risks the property market poses to future financial stability. They must take heed also of the OECD's advice by addressing posssible distortions in the tax system which put upward pressure on house prices.