Dan O’Brien: ‘Ireland’s new top banker can count on obscurity’


Dan O’Brien: ‘Ireland’s new top banker can count on obscurity’

An unknown outsider is to run the Central Bank. He will face demands to change mortgage rules, writes Dan O’Brien

Gabriel Makhlouf, former New Zealand’s treasury secretary. Photo: Vivek Prakash
Gabriel Makhlouf, former New Zealand’s treasury secretary. Photo: Vivek Prakash

Let’s start with the good news. Against expectations, the European economy perked up in the first few months of last year, figures published last week showed. That came after a widespread slowdown over the course of 2018. The risk of the continent returning to recession is considerably lower today than seven days ago. One cheer.

Across the Atlantic, the US economy also grew more strongly than expected in the first three months of the year. There, concerns were focused on an end to the sugar rush generated by Donald Trump’s tax cuts, which took effect early last year.

As that didn’t materialise, recession fears have receded there, too. Another cheer.

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Across the Pacific, the Chinese economy brought the third cheer of the week when it “surprised to the upside” – economist-speak for doing better than expected – in early 2019.

Policymakers across the world had been fretting about a “synchronised global slowdown” a week ago. The good news from across the world over the past seven days means that they will be wringing their hands a little less for the next while at least.

That the three mega-economies which account for most of the wider world economy all looked stronger in early 2019 than in late 2018 is good news for the highly globalised Irish economy. Quite remarkably, last year’s slower growth in some important trading partners and fears around Brexit have had limited impact here. That was reaffirmed last week with some new economic data.

Consumers continued to spend more (on everything bar cars) in March and the numbers in receipt of jobless benefit fell yet again in April, according to new figures published by the CSO last week.

The latest exchequer figures for April were not so hot. Tax revenues in that month were down marginally on the same month last year, an unusual state of affairs in recent years. But a single month should not be given too much weight, particularly as revenues over-performed in March.

Over the first four months of the year as whole, cash flowing into the State’s coffers was up a healthy 6pc on the same period in 2018.

The continued expansion of the economy and a lowering of the risk of a European and/or global slump is good news for many people, including the new boss of the Central Bank of Ireland whose appointment was announced last week.

Five weeks ago this column discussed the vacancy at the Central Bank – “None of the known candidates ticks all the boxes because it is all but impossible for any human being to have such a wide range of abilities, skills and talents” was one point made in that column.

Gabriel Makhlouf landed the job. He was not a known candidate and his appointment caused some surprise. I had never heard of him when it was announced last Wednesday that he had got the top job at the Central Bank. But from his CV and press reports, he would appear to tick many of the boxes.

Hopefully, he will remain unknown to most people – it is only in times of economic and financial crises that Central Bank bosses impinge on the consciousness of the average citizen.

If his seven-year term passes off without his coming to national prominence, it will be a success for all concerned. One can only wish him continued anonymity as he prepares for his move to Ireland.

But why was such an obscure figure chosen?

The Central Bank, a 2,000-person organisation, has been led by two academics back-to-back over the past 10 years. University professors tend not to be known for their managerial skills. Makhlouf is a life-long civil servant. Bureaucrats tend to be known for their abilities to manoeuvre in large organisations.

Running a modern Central Bank involves understanding the many complex functions that they are responsible for, identifying challenges, prioritising goals, allocating resources to meet priorities and, all the while, ensuring that the many different cogs in the machine are moving in tandem.

On paper at least, Makhlouf appears well qualified to run such a multi-siloed organisation. He has been serving as a senior policy maker on the other side of the world – in New Zealand – over the past eight years (nobody could accuse the headhunters tasked with finding suitable candidates of not scouring the planet). Prior to that he has been a senior civil servant in the British government and the holder of a high-level role at the Paris-based OECD.

Among the many matters Makhlouf will have on his plate once he gets his feet under the governor’s desk are the related issues of housing, banks and rules on how much people can borrow when taking out mortgages.

As it happens, economists at the Central Bank just last week published a report on some of these issues. It highlighted that the domestic Irish banks are glorified building societies – no other banking system in the Eurozone has more of its lending tied up in home loans than the Irish one.

In a healthy and well-functioning economy, the banking system should be channelling more of savers’ cash to businesses so that they can grow, but Irish banks have never been good at that. It doesn’t appear as if Ireland’s long record of weak business banking has changed by much despite the shock of the financial crisis.

The report did, however, highlight something more positive. It has been widely discussed that house price inflation has calmed over the past year or so, particularly in the capital where it was down to 1.4pc in February.

Less well known is the fact that commercial property price rises have slowed to similarly low rates, and have been low and stable since 2017.

In other words, prices of many classes of property are now changing in line with most other prices in the economy. This may sound to most readers like an arcane point of interest only to pointy-headed economists, but it is not.

Getting property prices of all kinds to move in line with other prices is something close to a holy grail for policy makers. That is because property prices have been the main cause of economic crashes and banking crises in rich countries in recent decades.

If they could be made to behave less wildly, and more like the prices of cars, furniture and food, everyone would be the better of it.

Part of the reason property inflation has fallen is because the building industry has recovered, fully in the case of the commercial construction and partially in the case residential construction.

Another reason is that banks are behaving differently from the boom period. Where they were worst burnt – on commercial property – they have hardly re-entered that market.

They have got back into the mortgage market, but are constrained by Central Bank rules on how much they can lend out to borrowers.

The next governor of the Central Bank is likely to come under some political pressure to ease these rules.

As the first non-Irish holder of the office, Makhlouf may find it easier to resist such pressure (he won’t be around forever).

How he navigates this issue will be one of the clearest public indicators of how he is performing in the job.

Sunday Independent


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