Brian Cowen (Laois-Offaly, Fianna Fail)

I welcome the publication by the Central Bank of its Financial Stability Report 2006 which reflects the bank's mandate to contribute to the stability of the financial system in Ireland. I note the report's main conclusion that Ireland's financial system continues to be in a good state of health. This is based on a detailed assessment of the risks facing borrowers, the financial position of the banking sector as well as recent stress testing of the system.

The bank's central expectation, based on an assessment of the risks facing borrowers, the financial position of the banking sector as well as the results of recent stress testing of the system, is that the current shock absorption capacity of the banking system leaves it well placed to withstand possible pressures. The report also highlights that the strength of the economy continues to support the stability of the financial sector.

The bank's report identifies vulnerabilities facing the financial system, including those arising from credit growth and house price inflation. Within the implementation of the overall legislative framework, private sector credit growth and debt levels are, in the first instance, a matter for the Central Bank and Financial Services Authority of Ireland. While the strong increase in borrowing is a sign of a healthy economy and a positive economic outlook on the part of borrowers, I fully support the vigilance of the Central Bank and the financial regulator on the issue of personal credit and mortgage debt and in reminding both borrowers and lenders of the need for responsible behaviour. The Government, for its part, will continue to contribute to economic and financial stability by pursuing a prudent fiscal policy.

Recent indicators point to continued moderation in house price inflation in line with increased housing supply and higher ECB interest rates. The consensus among commentators is for this trend to continue, resulting in a gradual cooling and soft landing for property prices in Ireland. The Central Bank's report shares the view that this is the most likely outcome.

In terms of the general economic implications of the rise in house prices and the associated increase in indebtedness in recent years, both borrowers and lenders need to be aware that interest rates are currently still low by historical standards. The Central Bank has highlighted the need for borrowers and lenders to factor into their financial decision making the prospective impact of potential changes in the future economic and financial environment. This also confirms the need for responsible budgetary policy to provide room for manoeuvre in the event of any unexpected sharp slowdown in economic growth.

The major element of household outstanding indebtedness is accounted for by residential mortgages. Demand for residential mortgages is underpinned by a number of factors, including strong new housing output, the growth in the economy, the accompanying pickup in employment creation and wages, the increases in household formation, significant net immigration and lower public sector indebtedness which facilitates the maintenance of low levels of taxation.

With regard to the Deputy's point regarding investors, the financial stability report states clearly that property remains a popular asset for investors as it continues to outperform other asset classes in the short to medium term. My overall view is that the report, with its main conclusion and its assessment of risks, makes a valuable contribution to the assessment and maintenance of financial stability in our economy.

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