Jack Horgan-Jones: Banks are making boom-time profits again. That’s a problem for politicians

The three big political figures of financial politics in Ireland – Minister for Finance Michael McGrath, Minister for Public Expenditure Paschal Donohoe and Sinn Féin finance spokesman Pearse Doherty – are all creatures of the financial crash, steeped in the crisis that began in 2008. In the past week, the financial sector has posted results that then would have seemed impossible. Bank of Ireland posted pretax profits of €1.03 billion for the first half of the year. Permanent TSB’s underlying profit was €82 million – a swing from a loss of €2 million this time last year, while AIB’s net profits were €854 million for the first half of the year, up 79 per cent. The Department of Finance must be purring, having spent much of the last 15 years clawing its way out of the financial black hole of the crash.

The root cause is not complicated. Yes, lenders have repaired their balance sheets over the last 15 years, helped most recently by a booming employment market and consolidation. But it is the drumbeat of interest rate hikes from Frankfurt that is really supercharging their performance as their deposits held by central banks turn from measly also-rans to rip-roaring centres of profit. The profits – and the interest rates underpinning them – herald their own set of political problems for the Government, and for McGrath in particular. Higher rates will cause problems at the fringe and at the core of borrowing.

At the edge, there are the borrowers whose Celtic Tiger-era loans were sold to vulture funds, facing nosebleed rates. There are about 80,000 primary home loans in this category – around 20,000 facing the highest rates. Not massive, in absolute terms, but they are exposed to the worst vicissitudes of the market. If your view is that the Government is uninterested, uncaring or outright hostile to the interests of this group of borrowers, then their fortunes will validate that outlook in a straight re-run of the political dynamics of 2008-2016.

But perhaps the more pressing problem for the government is how higher interest rates will impact middle Ireland – homeowners, or those in the rental sector with a realistic prospect of becoming homeowners – a cohort more likely to vote for mainstream parties. The Harmonised Index of Consumer Prices, which excludes the impact of mortgage interest, grew by 4.8 per cent in June – but the Consumer Price Index, which does account for mortgage interest, is 6.1 per cent. This is more reflective of reality for many borrowers. While Irish lenders have been slow to pass through interest rate increases, they are being passed on, and this will continue.

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The trajectory is clear: borrowing is expensive and getting more so, and will remain at a high plateau for some time. If you are coming to the end of a fixed-rate period, in all likelihood you will face a proper income shock, which comes on top of elevated cost-of-living pressures across the board. There are around 200,000 borrowers facing this between 2023 and 2025. If you fix again – perhaps at a rate approaching 5 per cent – you may see the value of your home begin to slide as affordability bites, but you will continue paying more than you ever have or ever envisaged on your mortgage. People coming off fixed rates are likely to have a negative experience well into 2025. The political stars on this don’t line up, with an election due by March of that year.

For renters hoping to become homeowners, even if house prices come off the boil, they will probably remain high, with affordability now putting decent homes even further out of reach. It is, one source in Government confides, an obvious storm cloud on the political horizon.

The simple truth is that hyper-profitable companies look bad to consumers who feel they’re getting screwed

Those awaiting the cavalry may be waiting some time. A targeted relief of some form for those most exposed may arrive in the budget, but a Covid-style fiscal response or widespread mortgage interest relief is highly unlikely. That doctrine is invoked in response to shocks to the system, not shocks from the system, designed in Frankfurt.

[ Many worse off by more than €5,000 a year as a result of nine ECB rate hikes ]

It is unlikely that the politics of banking will reinsert themselves in the very centre of political discourse before the next election – so the days that forged McGrath, Doherty and Donohoe are unlikely to repeat. It would take some crisis to supplant the quality-of-life, quality-of-service and affordability issues that are forming voter intent as the political system glides towards the ballot box.

General crankiness

But there is every chance that they will add to general voter crankiness, and be seen as another problem the system seems incapable or unwilling to solve – another high price for a service of middling or poor quality. And in doing so, they will interact with these other issues in unpredictable and potentially destabilising ways.

[ ECB will have an 'open mind' on whether to hike or pause rates in September ]

The simple truth is that hyper-profitable companies look bad to consumers who feel they’re getting screwed. The politics of this are straightforward – it was true last year for energy companies and for retailers this year – and demand some sort of response from the political class, which otherwise risks looking passive. All this lands on the head of McGrath– an instinctively cautious politician. One of the main functions of the Minister for Finance is to give political expression to the institutional power of his department – to keep the show on the road. But designing a response to this problem will require more than that, and McGrath will need to watch this political flank.