Private sector borrowings rose at the fastest rate in more than six years in May as demand for credit defied rising interest rates, writes Marc Coleman, Economics Editor
The level of total non-government borrowing now stands at €282.8 billion, and has increased by more than €62 billion, or 29.8 per cent, in the 12 months to May.
In May alone, €6.6 billion was added to the level of outstanding private sector credit, which includes business and personal lending. That is the highest monthly increase in a year.
The figures show that the recent rising trend in borrowings continues despite repeated warnings from the Central Bank about the danger it poses for the economy.
The rate of annual growth in private sector credit has accelerated by levels just under 30 per cent throughout this year from rates of just over 10 per cent in early 2003.
Coming in the wake of two rises in euro zone interest rates, in December and March, yesterday's data suggests that monetary tightening by the European Central Bank has so far done nothing to dent appetite for debt. "Despite a background of rising interest rates and high energy prices, the Irish public continues to borrow money as if there were no tomorrow," said Alan McQuaid of Bloxham stockbrokers.
IIB chief economist Austin Hughes said that, stripping out business lending, "we reckon that total personal debt in the economy is now just shy of €130 billion, suggesting an average debt burden of around €32,000 for every man, woman and child in the country".
For the first time this year, non-mortgage credit increased at a faster rate than mortgage business, jumping by 29.7 per cent year on year - driven by a significant rise in demand for term/revolving loans.
Mortgage lending was 29.5 per cent ahead of the levels in May 2005. The level of residential mortgage borrowing now stands at just under €109 billion, up from just under €84 billion in May 2005.
Nationally, €2.1 billion was added to outstanding residential mortgage borrowings in the month and the Central Bank said that, if residential mortgage loans were to rise by that amount each month for the rest of the year, the annualised rate of mortgage lending growth would be 24.5 per cent by December.
The bank noted that mortgage borrowing has grown at an average rate of 23.4 per cent annually between March 1997 and December 2005 - a period when house prices in the State rose by 14.9 per cent on average each year.
According to the latest Permanent TSB/ESRI index of house prices, the rate of annual house price inflation has increased from a rate of 6.6 per cent in May 2005 to a rate of 14.5 per cent last May.
Mr McQuaid said that the prospect of further increases would eventually trigger an adjustment in borrower behaviour.
"Although SSIA money will act as a positive buffer, consumers appear to be underestimating the extent to which interest rates are likely to rise in this cycle. There is no doubt that a sizeable amount of individuals and households are likely to start feeling the pinch sooner rather than later," he said.
He predicted that the European Central Bank would continue to raise interest rates over the next 12 months. "At the very least we can expect another three-quarters of a percentage point of tightening by the first quarter of next year."
Meanwhile, other data published yesterday suggests that growing indebtedness and rising interest rates are combining to weigh on consumers' outlook for their finances over the next 12 months. The IIB/ESRI consumer sentiment index produced a reading of 89.4 for June, down from 92.3 in May.
However, that hasn't stopped consumers spending. Yesterday's Central Bank figures show that an extra €1.1 billion was spent on credit cards in May and outstanding card balances are just shy of €2.4 billion.