Central Bank set to leave mortgage rules unchanged

23 Nov 2018

According to reports in this morning's Irish Times, the Central Bank of Ireland's annual review of its macro prudential mortgage lending rules (due for release next week) is set to leave all of the key rules unchanged, resisting calls from the banking sector to change how exemptions to the LTV and LTI limits are managed.

The sector has been lobbying the CBI to change the current calendar year exemption system to a 12 month rolling limit, thereby allowing the banks more flexibility in how they use their exemptions. The banks are allowed to lend 20% of FTB lending outside of the LTI thresholds, and 10% of all other lending outside (SSB) this limit. There are also 5% (FTB) and 20% (SSB) exemption levels on LTV thresholds. 

The Irish banks have found in recent years that a flurry of drawdown requests early in the year can leave them with little in the way of remaining exemption limits later in the year, causing drawdown requests to be delayed until the New Year. While the lack of any changes to the way the exemptions are used may be slightly disappointing to bank management, we do not expect it would have had any significant impact on total lending beyond some minor timing issues.

Brexit agreement

President of the EU Council Donald Tusk announced yesterday morning that an agreement at a ‘political’ level has been struck on the political declaration over the future relationship between the EU and the UK. The final political declaration runs to 26 pages instead of 7 (last week’s draft), although a fair proportion of it is concerned with issues such as Security and Institutional arrangements.  In terms of areas related to the economy, we would make the following points: i) a free trade zone in goods between the UK and EU is envisaged; ii) on customs the declaration says that both parties will put in place ‘ambitious customs arrangements’. 

This hints (without committing to) the Chequers plan idea of a partnership to negate the need for UK/EU customs checks, including on the island of Ireland. There is a specific mention here of using all available technologies, which could be read as a ‘sop’ to Brexiteers whose preferred solution to the Northern Ireland / Republic of Ireland border issue was to use technology to track goods across Ireland (maximum facilitation); iii) for financial services, each party should assess each other’s frameworks to judge whether they are equivalent, ideally by the end of June 2020, to facilitate market access; iv) on fishing, a new fisheries agreement should be ratified by 1 July 2020. But there is not much granularity in the document, especially compared with the 585 page Withdrawal Agreement (WA). Sterling gained over a cent or so against the USD to trade at $1.2900 following the announcement, whilst EURGBP is back trading below the 89p level. 

ECB account

The accounts to the last ECB meeting (25 October) revealed that the ECB remained relatively relaxed over the economic outlook, despite a softening in Euro area data of late. The Governing Council (GC) acknowledged that whilst some incoming data had been weaker than expected, overall its assessment was that data remained consistent with the ECB forecasts that were published in September. The GC did not have the Q3 GDP print at the time of the meeting, but it noted that country specific factors were likely to impact the numbers (notably changes to car emissions standards impacting Germany). 

The GC acknowledged that survey evidence has been weakening (Composite PMI), but again put forward the view of temporary and sector specific factors playing a part and that these should have a fading impact going forward. Global trade remained a concern, with some suggestion that uncertainty may be influencing corporate investment, but the ECB also noted that the softening in trade growth appears to be stabilising. 

Overall the accounts do not suggest that the ECB is overly concerned about recent economic data outturns, although it noted that December’s GC meeting will provide an opportunity for a more in depth assessment. On inflation there is no real change in the GC’s view, which continued to note an increasing confidence that inflation will trend to target in the medium term. There is a remark on the Q2 wage numbers which have shown a firming to 2.3% yoy. Overall the account does not suggest there has been any real change in the ECB’s assessment of the outlook or the fact that net asset purchases should end at the end of the year, as planned.

Eurozone PMI (Nov)

IHS Markit reported that the Eurozone composite PMI had dropped 1 point to 53.1 in October, its lowest outturn in over two years. Weaker growth in manufacturing output was largely to blame, having expanded at the slowest pace since December 2014. However, activity was also softer in the services sector, increasing at the weakest rate since the start of 2017. On the industrial front, export orders fell for the first time in nearly five-and-a-half years, with a number of respondents linking this to trade tensions and tariffs. 

Domestic issues also look to be playing a part, with individual PMI reports from Germany and France pointing to changes in EU car emission tests having disrupted the automotive sector. While the latter should begin to unwind as production bottlenecks ease, media reports do not suggest car output has fully recovered this month. 

Additionally, the Eurozone’s automotive sector is still at risk of being subjected to higher car tariffs by the US administration, with President Trump repeating the threat on the November midterm election trail. Turning to the services sector, we expect this to have remained constrained by capacity issues. Based on these factors, we expect the composite PMI to hold steady at 53.1 in November. The numbers are due for release at 09.00 this morning. 

Economic Forecast

09.00 EC Manufacturing PMI
09.00 EC Services PMI
12.00 EC ECB’s Guindos speaks
14.45 US PMI