In its first Financial Stability Review of 2025, the bank said its assessment is that the risks facing the financial system have increased since it last reported, in December.
“In the short run, the main channel through which these developments are likely to affect the domestic economy is uncertainty, as well as a reduction in external demand,” said Gabriel Makhlouf, the bank’s governor.
“There has already been some softening in consumer sentiment and industry engagement points to cautiousness amongst companies, at least for now, in terms of new investments.”
He said that borrowers and the Irish banking system have built up substantial resilience in recent years, and these strong financial positions provide an important buffer against potential adverse shocks.
“Given the ongoing uncertainty, however, it is important that we are prepared for potential macro or market shocks, and that the financial system is maintaining – and indeed, where necessary, building – both financial and operational resilience for the period ahead,” Mr Makhlouf said.
A large proportion of households work in sectors dominated by multinationals
Increased uncertainty may lead to even stronger household savings, which would slow consumption and broader economic activity, and potentially affect house purchase decisions, the Financial Stability Review said.
It noted that the April consumer sentiment index – the first since Donald Trump announced “reciprocal tariffs” – reported the largest decline since the onset of the Covid pandemic, although this was followed by a modest improvement in May.
“A large proportion of households are employed in multinational enterprise-dominated sectors, or in the broader export-orientated sectors. An analysis of stock of mortgage credit shows a high proportion of lending to households in these exposed sectors,” the review says.
“While the debt-service ratio for households has remained stable over the past number of years, credit risk via [that] sector represents a potential channel through which a trade shock may impact the domestic financial sector.”
Although they are in a stronger position than in the past, households are exposed to potential future increases in borrowing costs, the bank points out. About 40pc of mortgages are on variable rates. Of the rest, most are fixed for less than five years.
The Government could also face higher interest rates on its borrowings, the review notes. As global government bonds yields rise, the interest bill on Ireland’s national debt will go up, and loans will roll over onto higher rates than in the past.
The higher cost of corporate bonds could also have an impact on the housing market, leading to less investment in house-building.
“As non-bank lenders that are active in Irish real estate can be sensitive to global capital market developments, a persistent deterioration in global financial conditions would have implications for development financing – and could exacerbate the recent falls in private capital for residential development,” the review says.
“Further, while the Irish sovereign has a current strong funding position, Ireland’s high US exposures combined with any perceived or realised negative economic impacts arising from future trade or tax announcements may raise future borrowing costs.”
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