THE Central Bank has warned that the economy may be overheating and is to ask the banks and building societies to justify. their mortgage lending policies.
The warning comes as an Irish Times investigation highlights how lending institutions appear to be breaching existing guidelines. Lenders are prepared to advance more than three times applicants salaries, against the traditional guideline of 2.5 times salary.
The bank says the top policy priority for the year ahead must be to prevent an "unsustainable expansion" and the "inevitable disruption and adjustment costs that would follow from that".
The bank wants to maintain stable growth of 5 to 6 per cent without creating an unsustainable boom. However, it said, there is little it can do to prevent the economy growing too rapidly.
Its ultimate weapon would be to raise interest rates. However the Central Bank assistant directors general, Dr Michael Casey said the bank is happy with interest rates at their current levels. These are unlikely to change, he said, except if there are changes in German rates.
In its spring bulletin the Central Bank has warned that the economy is now overstretched, with bottlenecks appearing in areas such as construction. It also warned that the 1997 Budget was "too expansionary".
In a strongly worded statement the bank said the size of the tax concessions and their front loading in the Partnership 2000 agreement run the risk of increasing inflation.
It added that greater discipline in public spending would have provided more scope for tax forms and reductions.
However, the news of £49 million in spending cuts announced yesterday will go some way to assuaging the Central Bank's concerns.
The cuts have been agreed to offset the cost of the nurses' pay package. More than £20 million will be cut from the Department of Social Welfare spending estimate for this year, mostly due to the falling unemployment live register. Almost every other spending Department is to make small cutbacks to meet the requirement.
The Government also warned that the whole of Partnership 2000 would be put at risk, if other groups received rises of the same level as the nurses.
As well as Budget policy, the Central Bank has other concerns, particularly credit growth and the housing market.
The bank is hoping for an increase in savings to offset the amount of credit in the economy. However, Dr Casey admitted there is little they can do to encourage this other than "to pray".
The rise in house prices is another cause of concern, Dr Casey said. He warned that house prices are now entering "uncharted waters" and we have to try to avoid following the British into. negative equity. The problem, he warned, is that there are signs. house prices are being driven by panic buying. If there is a speculative bubble it could feed into inflation, he warned.
The bank will write to all the lenders next week to determine the extent of lax lending.