I am joined today by deputy governor Ms Sharon Donnery. My other deputy, Ms Derville Rowland, sends apologies as she is indisposed. We welcome the opportunity to appear before the committee. I will begin by giving a brief overview of the economic outlook before discussing the changing financial system in Ireland and our new strategy, as well as outlining our regulatory priorities for the year.
A key component of the outlook we are all focused on is the economic consequences of the war in Ukraine. I should start by saying that the economic consequences are very much a secondary consideration compared with the human consequences, the human suffering and the destruction and horrors we are witnessing in Ukraine. It is a reminder that peace in Europe and being united in our diversity and our shared values is what the European Union is ultimately about. Being part of the European system of central banks and the spirit and values it represents is something the Central Bank of Ireland is extremely proud of and very committed to.
On the outlook, the economy overall has proven resilient through Covid-19 and, prior to the war in Ukraine, robust growth was expected over the coming years. A major factor behind the resilience of the economy in Ireland and across Europe and further afield has been the support provided by governments and policymakers to mitigate the effects of the pandemic. Central banks across Europe and globally responded forcefully to ensure price and financial stability were maintained.
The strength of the recovery in the labour market in Ireland from the Covid-19 shock has been encouraging, as the standard International Labour Organization, ILO, rate of unemployment is now approximately 5%, with the Covid-adjusted rate at approximately 7%.
Regarding inflation, according to the latest available data, consumer price inflation in Ireland as measured by the harmonised index of consumer prices, HICP, rose to 5.7 % in February. This is the highest rate of inflation since late 2000, and is in stark contrast to the experience over the decade preceding the onset of the pandemic, when inflation averaged 0.5%. We know many people are feeling these very real price increases, in particular across their energy and fuel bills. The current rates of inflation are driven by higher global energy prices and supply bottlenecks, with some knock-on implications of the energy price rise for the prices of other consumer goods and services. It should be noted these increases in official consumer prices for energy and fuel are yet to reflect in full the developments of recent weeks and the implications of the conflict in Ukraine. Neither do we understand yet the full impact of the latest increases in Covid case numbers across the world. We are concerned at the impact of inflation. From a euro area perspective, as a member of the governing council of the European Central Bank, the experience in Ireland is similar to that across member states and indeed across the globe.
As for the economic consequences of the war in Ukraine, it is too early to give a definitive view. It clearly represents a significant challenge to the outlook for inflation and growth and adds new uncertainty to what had started to become a less uncertain picture. The war is likely to have a material impact on economic activity and inflation in the euro area. In some countries, including Ireland, the effects will be more indirect than for others, although that does not mean they will be insignificant. Of course, as far as inflation is concerned, the governing council will take whatever action is needed to fulfil the ECB’s mandate to pursue price stability.
The financial landscape in Ireland has undergone significant change in recent years. Ireland is seen as an attractive location for financial service providers to operate in, partly because we are part of the European Single Market but also because we are an open and globalised economy, have a skilled workforce, operate within the rule of law and have a supportive regulatory and policy environment. The financial sector has seen significant change since the global financial crisis, with a reduction in the size of what might be described as the traditional sector and expansion elsewhere. Since 2018, the growth of the financial sector has continued apace, coinciding with the UK’s departure from the EU. For example, since the second quarter of 2018, there has been 72% growth in assets under management in investment firms, 138% growth in the number of payment and e-money firms authorised by the Central Bank, 72% growth in fund service providers and 66% growth in the insurance sector. More broadly, since 2016, the Irish market-based finance sector is increasingly outward looking, with greater exposures to the rest of the EU, the US and around the world, including the UK.
Technological change is disrupting the landscape of financial services, with new entrants, new business models, a race by incumbents to invest in developing the necessary capabilities, and in many cases the potential for a fundamental disruption in the value chain of traditional financial services firms and sectors. This has impacted different sectors such as the retail banking sector, payment and e-money firms as well as new emerging areas such as crypto.
New payment methods and platforms bring challenges for the traditional role and dominance of banks in this area, while digital payment channels have lowered the barrier to entry for alternative providers. We are also seeing increased new lending from non-bank lenders and retail credit firms, which offers customers increased choice.
Technology has meant the provision of many financial services can occur from non-traditional banks and this must be borne in mind when we consider competition in the market. The new ways of accessing finance and the entry of new participants presents a challenge and an opportunity to incumbents to continue to innovate and meet the needs of consumers and businesses. In regard to the retail banking sector we are inputting into the Department of Finance’s review that addresses some of these issues. As an open, engaged and future-focused regulator we seek to anticipate and support innovation in financial services and understand and adapt to the far-reaching changes taking place within the industry. Our objective is to ensure the regulatory context enables the potential benefits of innovation for consumers, businesses and society to be realised, while the risks are effectively managed.
Innovation in financial services has the capacity to bring benefits for consumers, the economy and society in general. However, while innovation is good, not all innovations are good, and not all good innovations are done well. It is our responsibility to get the balance right that sees and supports the benefits of innovation in financial services for the economy and consumers, while also ensuring the stability of the system and that the interests of our own and other EU citizens are protected.
The rapidly-changing world of financial services sets the context for the Central Bank's new strategy. The speed and scale of technological change, in particular, has brought significant opportunities that are matched by similar risks. I believe the next decade will continue to be characterised by rapid change in our economies and in the financial system, driven by technology, by the need to respond to climate change, by an ageing society, and, perhaps most immediately by the move to different ways of working. At the Central Bank we will need to accelerate our own pace of change to meet the challenges and the public’s expectations of us. We are facing a future of complexity and uncertainty but also of opportunity. We will need to continue to evolve if we are to be front-footed in our response to these challenges. Our strategy recognises the emerging context and the need to change the way we work and what we work on. It also recognises that we are building from strong foundations. The strategy’s four connected themes represent a renewal and repositioning to ensure that our direction and ambitions over the next five years are responsive and forward looking. The world in which we operate is changing rapidly. The economy, the financial system and financial services and products are changing and will continue to change over the coming years. We want to be future-focused and ready to deliver our mission through these changes and that will require a shift in our focus, our analysis and our frameworks. It will also require a step-change in our engagement. The rapid pace of change and the expectations of our stakeholders mean that we need to be well-connected with them. It will require us to be open and engaged, explaining what we are doing and what we are not doing. It will also require us to listen to individuals and businesses throughout the country so that we can understand the issues they are facing and help them to understand the actions we are taking in response.
In a rapidly changing world we have to transform the way we operate if we are to succeed. We will need to invest in new skills and capabilities, becoming more agile and looking for continuous improvement in the way we work to meet the challenges of an evolving financial system. Our ability to turn data into information and to provide our people with the tools to use it effectively will be an important platform for our transformation.
In regard to safeguarding, we will remain steadfast, working with our European colleagues, in particular, to maintain price stability and the stability of the financial system overall, as well as the effective regulation of financial services and markets. The Central Bank is ultimately about its people and their skills, capabilities and commitment to work in the public interest. I look forward to working with all of them as we meet the challenges ahead and deliver on our new strategy.
Our regulatory priorities for the coming year support our new strategy and the need to respond to the dynamic and growing financial services system in Ireland. Particular milestones in our work programme this year include: completing our framework review of the macroprudential mortgage measures; contributing to the European review of capital buffers for banks, including ensuring their usability in times of crisis, and concluding our own review of the bank capital framework; starting a comprehensive review of the consumer protection code by publishing a discussion paper and engaging widely with stakeholders on it; introducing new measures to address risks in Irish property; and putting in place a structured framework for engagement which will include an industry stakeholder forum, a financial system conference and a climate risk and sustainable finance forum. We will continue to prioritise our authorisation work across multiple sectors, recognising the benefits of innovation, disruption and competition, but also the importance of protecting consumers of financial services and the importance of applying clear and consistent standards.
We will act across a number of initiatives to enhance the payments environment, including participating in the work on a digital euro, promoting low-cost instant payments domestically and across Europe and contributing to the review of the payment services directive, PSD2, and the functioning of open banking. On the microprudential side, we will maintain our focus on the financial and operational resilience of the financial sector. Key priorities here will include our work on stress testing and other financial resilience-related work across multiple sectors. The supervision of business model and technology-related change will also be a priority as firms implement new technologies and respond to changing customer preferences. We will maintain a continued focus on operational resilience, covering cyber-resilience, critical infrastructure and outsourcing.
In line with our mandate for conduct and consumer protection, we will continue to drive for fair outcomes and for consumer and investor interests to be at the centre of financial services. Our priorities include business interruption insurance, long-term mortgage arrears and oversight of the withdrawal of Ulster Bank and KBC from the Irish market. We will also continue to enhance the reports from the national claims information database to support the wider policy agenda towards a better functioning non-life insurance sector. We will also continue to step up our work on climate change to both ensure the financial system can support the transition to a carbon-neutral economy and is suitably resilient to the risks. This will include continuing to ensure that financial firms are adapting business models and building resilience in the face of growing climate and transition risks. We will also focus on the development and marketing of "green" financial services products and services such that they are meeting high standards of quality and disclosure. We will learn from and apply international best practices, including through our participation in the network for the greening of the financial system, NGFS. More broadly, we will continue to evolve our regulatory frameworks and supervisory approaches to ensure the interests of citizens and the economy are well served by innovation in the financial sector. This includes a review of our innovation hub that was set up four years ago to support engagement between the bank and innovators and has provided a valued and successful service. In light of the changing landscape it is timely to review its functioning and consider any enhancements that could be made. As we in the Central Bank look ahead to the challenges we face in the coming months and years, a determination to be future-focused, to be open to change and to different ways of thinking and doing, however uncomfortable it can sometimes feel, will enable us to achieve the goals of our new strategy and to deliver our mandate.
In conclusion I will leave members with three points. First, while there is significant uncertainty around the war in Ukraine, the path of the pandemic, and the persistence of inflation, the outlook for the economy remains broadly positive, notwithstanding the obvious headwinds. Second, our regulatory approach aims to get the balance right between supporting innovation and change while safeguarding stability and protecting consumers. Finally, our strategy represents a renewal and repositioning of the Central Bank to face the challenges of the future. Ms Donnery and I will be happy to take your questions.