The Central Bank has issued its starkest warning yet to banks and financial institutions about excessive lending and expressed concern about the threat to the economy from the Government's budgetary policy. Its warning that the biggest risk to the economy lies in a sharp downturn in the US came as the US Federal Reserve warned that the economy is slowing so fast there is a risk of a sharp downturn and even recession. A slowdown in the US would have serious repercussions, particularly in Ireland where US multinationals account for such a large proportion of output.
Inflation, house prices, credit problems and growth are all very vulnerable to the increasing demand created by the Government's polices, the bank warned in its winter bulletin. It is revising up its inflation forecasts for 2001 to 5 per cent from 4 per cent as a direct result of the recent Budget and revised partnership agreement.
According to the bank, the expansionary Budget, spending estimates and pay rises will more than offset indirect tax cuts announced in the Budget.
Overall, it says, the biggest danger to the economy is a sharp slowdown in growth in the US economy. Last night the US central bank, the Federal Reserve, warned that economic growth would slow further, consumer confidence was down and there were shortfalls in sales and earnings. According to the Irish Central Bank's assistant director general, Mr Michael Casey, growth will fall to around 5 per cent a year in 2002, after growth of 7.25 per cent in 2001, simply because there are not enough new people coming on to the labour market.
It also warned that the Government should be trying to rein back spending. In his fifth letter to the lenders, Central Bank governor Mr Maurice O'Connell warned that "some institutions are not as attentive as they might be to the imperative [to minimise bad debts]".
The full text of the Central Bank's winter bulletin can be found at www.ireland.com