Federal Reserve

18 Sep 2019

Irish banks - SME credit rebounds in Q219, but still lower y/y

Total outstanding Irish SME credit on the balance sheets of Irish banks increased by 0.9% q/q over Q219 (the largest quarterly increase since 2011) to stand at €22.6bn, but continues to contract on an annual basis, falling by €806m or 3.4%, according to data released by the Central Bank of Ireland yesterday. 

We would suggest the solid Q2 data may have been at least partially due to the clearance of the original March Brexit cliff edge, which would have been a boost to sentiment/confidence for many of the export focused SMEs likely to be impacted by any disorderly Brexit outcome. However, as such, a weaker finish to the year is not unlikely given the continuing impasse being played out in London and Brussels. 

The total stock of SME credit includes €7.9bn relating to property and €14.5bn of core SME credit. Gross new lending to SMEs was €1.4bn during Q219, while gross new lending to core SMEs was €914m, representing an increase of €102 million compared to Q119. Over the past twelve months, new lending to all SMEs totalled €5.3bn, while new lending to core SMEs totalled €3.6bn, with SMEs engaged in the wholesale/retail trade, and agricultural sectors accounting for the majority of new drawdowns in both quarterly and annual terms. Property-related lending accounted for 36% of Q2 lending, or €522m. 

FED to show their stuff

The Federal Open Market Committee (FOMC) is due to meet today to announce its latest policy decision at 7pm (Irish time). The policy announcement will be accompanied by new economic projections and will be followed by Chair Jay Powell delivering his press conference at 7.30pm. The two key questions are; (1) will the FED follow the 25bp cut made in July rate with a further move today and beyond that, (2) will the FOMC signal any further easing ahead. Our view is that the FOMC will announce a 25bp reduction in the Federal funds target rate range to 1.75%-2.00%, but keep its cards close to its chest on what might be seen beyond that. 

At the Fed’s last policy meeting in July, the Fed chief pitched the 25bp cut to the target rate as a ‘mid-cycle adjustment’ and refused to be pinned down on what further easing this might, or might not be followed by. However, there was a clear focus on the external backdrop in the Fed’s thinking, where overseas growth was noted as weak and trade was listed as a factor behind this backdrop. Since July, trade developments have been unfavourable as the US-China trade dispute has worsened with a new wave of tariffs threatened and some more applied. President Trump certainly sees these developments as making the case for more policy easing, having tweeted ‘now the Fed can show their stuff’, after the August escalation. 

More broadly, there has been little cause for celebration in the global economic backdrop, amidst subdued economic data for many of the world’s largest economics. However, note that overall the domestic US economic backdrop is far from weak and as such the decision over whether to support any September easing will not be straightforward for all members.

The case for a bigger adjustment would likely be most strongly argued for by the St Louis Fed’s James Bullard, who we think will dissent against any smaller 25bp easing agreed. Indeed, we note that Mr Bullard has talked of aggressive action being needed whilst saying a 50bp move would align the Fed with market expectations.

However, the debate will not just be about whether to make a 25bp or 50bp adjustment but also whether to ease policy at all. If we are correct that the Fed will cut rates today, then the accompanying statement and Chair Powell’s press conference will be eyed for clues as to whether we can expect a third subsequent rate reduction at the October meeting. Our assumption is that a further 25bp cut will be forthcoming at that October meeting. Markets are priced for between three and four 25bp cuts between now and the end of next year and risk sentiment is predicated on this stimulus being forthcoming. 


Economic Releases

09.30  UK   CPI

10.00  EU   CPI

19.00  US   FOMC Meeting and Powell Press Conference