- While the resilience of the financial system has been enhanced over the last decade, only the initial economic effects of the pandemic have been seen so far.
- The crisis is a truly global event, unprecedented in terms of size and speed, with uncertainty greater than that seen in 2008/2009.
- The Central Bank is focused on ensuring the financial system absorbs rather than amplifies the shock of COVID-19 but the resilience of the system is not limitless.
Addressing an online presentation hosted by the Institute of International and European Affairs, Deputy Governor Sharon Donnery spoke about Risks, Resilience and Policy Responses to COVID-19.
Recognising the starting resilience of Irish households, businesses and the domestic banking system and the steps taken by governments and central banks to mitigate the effects of the crisis, Ms Donnery said, “On the eve of the crisis, the financial system was stronger than a decade ago, but the resilience is not limitless, and its continued stability is being heavily supported by policymakers worldwide. The full effects of this crisis will emerge over time as the damage and scarring to sectors is realised, and the extent depends on the path, persistence and waves of the virus and the necessary public health responses.”
Comparing COVID-19 to previous economic shocks, Ms Donnery described the crisis as a truly global event, unprecedented in terms of size and speed, with uncertainty greater than that seen in 2008/2009.
“The OECD has warned of the worst peacetime recession in a century. Their latest numbers, in a single wave scenario, estimate global economic activity to fall 6% this year. In contrast, at the peak of the 2008/2009 financial crisis, global growth fell by 1.7%.
“A Business Cycle Indicator (BCI) for the Irish economy, developed by the Central Bank, offers a timely assessment. The BCI indicator fell to an unprecedented low in April, almost twice as low as the trough of the financial crisis in 2008/2009. It remains to be seen how these effects persist as the economy slowly reopens and we learn to live with COVID-19 over the medium term.”
She highlighted that there are clear risks to the macro-financial outlook in Ireland, “The macro financial risks of possible defaults, rising risk premia, tightening financial conditions and increased debt burdens are coupled with the structural vulnerabilities we are exposed to as a small open economy. In addition, other risks have also not disappeared. The ongoing uncertainty surrounding Brexit negotiations is a serious concern.”
Ms Donnery also highlighted the range of significant fiscal, monetary, macroprudential and microprudential actions which have been taken over the last three months to support households and businesses through the crisis, and to ensure that the financial system can best absorb and not amplify the shock. In this uncertain environment, swift, decisive and credible policy action can help provide some certainty.
Central banks, including the Central Bank of Ireland are playing their part and “have conducted monetary policy to maintain liquidity in the financial system, to support the flow of credit to the real economy and prevent a tightening of financing conditions. Central to our pursuit of price stability, the current aim of monetary policy is to help ensure the continued supply of credit to the economy through the crisis and to aid its recovery from the shock.”