THERE was further confirmation yesterday that the economy is booming and that consumers are out in force. Demand for credit is growing strongly while there is no sign of a fall off in mortgage borrowing.
Underlying growth in lending by the financial institutions came in at 14.3 per cent at the end of August, from 13.3 per cent in July. The figures, at the top end of analysts' expectations, are bound to worry the Central Bank which is looking for credit growth in single figures this year. Its official target is 7.5 per cent.
At the same time, residential mortgage lending was up 16.3 per cent on the year at the end of August, compared to 16.1 per cent in June. This represented an increase of £115 million, while other mortgages increased by £20 million.
Mr Alan McQuaid, economist at Bloxham Stockbrokers, said he expected demand for credit to keep on growing. "It will be running at double the target level within a couple of months," he said.
He added that there was little solace for the Bank in figures released by the Department of the Environment on house prices. The rise in quarterly and annual new house prices over the same period were 10 per cent and 15.2 per cent respectively, he said.
However, private sector credit grew by only £227 million or 0.7 per cent in August, the smallest increase since February but larger than the increase in August of last year. Foreign currency lending rose by £102 million, the proportion of the total increase in private sector credit in this category was higher in August than in previous months.
Mr Dan McLaughlin, chief economist at Riada Stockbrokers, said the latest credit growth figures were not numbers which would encourage the Central Bank to cut interest rates. The figures showed a very significant acceleration in mortgage lending and would cause concern at the Central Bank about the potential inflationary threat, he warned, "the figures are an argument for keeping interest rates tight. But on the other hand the Central Bank is selling pounds and causing downward pressure on rates. The two are incompatible. This highlights the dilemma facing the Central Bank."
But NCB economist, Mr Dermot O'Brien, said the level of credit growth - consistent with the strong growth in the economy. There was no evidence of any rise in inflation, he said.
Domestic credit institutions increased their holdings of Government bonds by £83 million in August while non resident holdings of Irish Government securities rose by £164 million.
The official external reserves were £5.2 billion at the end of August as EU receipts and foreign exchange market intervention exceeded interest and principal payments on the Exchequer foreign debt. A valuation adjustment of £151 million reduced the extent of the increase in the reserves.
The figures threw the Central Bank's dilemma on the choice between a lower value of the pound or higher interest rates into sharp focus, analysts said.
Yesterday, the pound remained low against sterling, ending the sessional 102.15p from 102.11p a day earlier. The figures will provide relief to exporters as well as farmers but the Central Bank will be wary that these levels could feed through to imported price rises from Britain, as British imports cost more.
And while some of the steam went out of the Irish bond market yesterday after the extraordinary gains of the past few weeks, market makers said there was still a huge appetite for stock from overseas investors. "The credit figures might have been a bit on the high side, but the overseas investors are still convinced by the convergence argument."
