Economics: Mortgage debt in Ireland is still growing strongly and the rate of growth accelerated again in July, following a mild deceleration in the previous month.

There is no doubt that if the Irish Central Bank had retained monetary sovereignty, the cost of borrowing would be rising in response to this record level of debt creation. But the European Central Bank now calls the interest-rate shots and must take account of conditions across the euro area, and to that end it is noticeable that the ECB is becoming concerned about the rise in European mortgage debt. Indeed, the ECB may well cite mortgage lending as a factor behind the decision to raise interest rates, when that day finally arrives.

Central Bank concern about household debt creation is a familiar refrain in Ireland and the UK but has not featured in the rhetoric of the ECB. This is partly due to the fact that euro-zone credit growth in general has been relatively subdued in recent years, but also owes something to a predilection of the ECB to focus on monetary growth rather than the lending side of the balance sheet.

In fact, in some respects the ECB can be regarded as the last bastion of monetarism, that doctrine which held sway over policymakers and academics alike in the 1960s and 1970s. The idea was simple - if the Central Bank creates too much money, inflation will be the result. The policy implication is clear - to avoid inflation, central banks should control the supply of money. Hence, monetary targeting became the vogue across the global central bank community.

Over time, however, any stable relationship between the quantity of money in circulation and the price level appeared to break down in many countries and most central banks lost faith in this approach and few now place much, if any, emphasis on the money supply as an important indicator. The ECB is the exception and devotes time at its regular monthly press conference to discussing monetary trends and space in its monthly bulletins. Moreover, the Bank publishes a "reference value" for monetary growth, which it deems consistent with stable prices.

For some monetary diehards in the ECB, therefore, the fact that money-supply growth has consistently exceeded this reference value (currently 4.5 per cent) since mid 2001 is seen as a problem, particularly as the cumulative excess now exceeds 9 per cent of the outstanding money supply. This excess liquidity could thus be seen as a harbinger of future inflation and therefore as reason enough on its own to raise interest rates. The August edition of the ECB's monthly bulletin spells it out: "There remains substantially more liquidity in the euro area than is needed to finance non- inflationary growth."

The counter view stresses that it is not clear whether this excess liquidity will translate into additional spending, an uncertainty which the ECB acknowledges and which explains why these monetary developments alone have not been sufficient to trigger a change in interest-rate policy. But the monetary vigilantes have a new, related development to support their view - the acceleration in the growth of bank lending in general and the increase in mortgage debt in particular.

Lending to the private sector in the euro area grew at an annual rate of 6.2 per cent in July, for example, from 6 per cent in June, with lending to households growing at a faster pace of 7.3 per cent, up from 7.2 per cent. In terms of residential mortgages, the annual growth rate in July also picked up momentum, rising to 9.2 per cent from 9 per cent the previous month.

This doesn't sound unduly alarming, particularly when set against a comparable Irish figure of over 31 per cent, but the aggregate figure is dampened by the weak state of the German housing market, with mortgage-lending growing at a double-digit pace in a number of the large European economies. The ECB is becoming less comfortable as a result, referring to the rate of mortgage growth as "rather high" in its August bulletin. In addition, the ECB noted an easing of credit standards across the zone in the second quarter, implying that customers were finding it easier to get loans from financial institutions.

So the ECB finds itself in new territory, albeit familiar terrain for some other central banks - the worry that unusually low interest rates, designed to support the economy as a whole, risks fuelling a rapid and ultimately unhealthy expansion in one sector, in this case housing. As yet, the markets have not taken this prospect very seriously (the first rise expected in ECB rates has been pushed into 2005) but this could change quickly if the ECB chooses to give greater prominence to mortgage lending in its public utterances. No doubt Dame Street will applaud the first rate rise by the ECB whatever the justification.

Dan McLaughlin is chief economist with Bank of Ireland