The Central Bank has given its clearest indication yet of a reluctance to change its strict rules on mortgage lending and warned that adopting a “fine tuning” approach could lead to financial instability.

Speaking at the annual economic policy conference of the Dublin Economic Workshop, the deputy governor of the Central Bank of Ireland, Sharon Donnery, said the benefit of adjusting the rules would have to be significant as a “stable regulatory regime was key to eliminating uncertainty”.

She also warned that uncertainty would remain a central feature of the economic backdrop against which policymakers would have to make decisions in the years ahead.

Under the Central Bank rules as they stand, first-time buyers need a 10 per cent deposit for the first €220,000 of a house price and 20 per cent for the balance while all other buyers must have a 20 per cent deposit in place. In addition, the Central Bank requires that lending limits of 3.5 times income are applied by the banks before approving mortgages.

A recent consultation process, which will inform the bank’s review, yielded 50 submissions, several of which called for the threshold below which first-time buyers have to pay only a 10 per cent deposit to be raised from the current level of €220,000.

Ms Donnery said “the evidence threshold to justify a material loosening or tightening of the rules is significant for two reasons. First, stable rules are valuable for both households and mortgage lenders in eliminating avoidable uncertainty about the regulatory regime. Second, the noisy and volatile nature of macro-financial data means that it would be unwise to seek to adjust the rules in response to minor and temporary fluctuations in the state of the financial cycle: such a fine-tuning approach could actually aggravate financial instability if revisions proved to be unwarranted or badly timed.”

She said that while the costs of the measures could be “immediately felt and is quantifiable to the banks or borrowers to which they apply, the benefits are often unobservable”.

Precise impact

Addressing Brexit, Ms Donnery said the precise impact on the Irish economy was uncertain but warned that the “short- and medium-term impact is likely to be negative”.

She said the Republic was the most exposed European economy to the potential effects of Brexit because the UK accounts for a large percentage of Irish imports and exports and because labour flows and cross-Border investment linkages are considerable.

“There is considerable uncertainty regarding the specific political and institutional construct which may emerge once the UK decides to trigger article 50 of the treaty. This makes it challenging to estimate the impact on the Irish economy.”