Financial Stability Review Highlights Rising Global Risks for Ireland's Economy

The Central Bank of Ireland has released its first Financial Stability Review of 2025, offering a comprehensive assessment of the risks facing both the global and domestic financial landscape. This review comes at a time when uncertainty on the world stage has grown, largely due to evolving trade policies and increasing market volatility prompted by the United States' shifts in tariffs and reciprocal moves by other nations.

Governor Gabriel Makhlouf underlined that the review’s purpose is to identify not what is expected, but what could happen—including potential downside shocks to financial stability. He noted that the risks to Ireland’s financial system have increased since the last review, mostly due to international developments. Over the past several months, three interconnected shocks have challenged the global economy: a significant adjustment in trade policies, a rapid surge in policy uncertainty, and heightened market volatility. The resulting rise in tariffs and ambiguity over where such policies will settle has weakened global growth forecasts and left financial markets exposed to sharp adjustments if uncertainty persists.

Ireland, as a small, open economy heavily reliant on US foreign direct investment, is particularly vulnerable to these external shocks. Already, consumer confidence has softened, businesses have grown more cautious about new investments, and earlier forecasts for economic growth have been revised downward. The review points out that a slowdown in activity among US multinationals, especially in sectors like pharmaceuticals and ICT, could adversely affect jobs, tax revenues, and investments. Such outcomes would put pressure on Irish banks and investor sentiment toward Irish assets.

The review also details how the spike in market volatility triggered greater liquidity demands from investment funds based in Ireland. While the financial sector absorbed these demands smoothly, the report warns of ongoing vulnerabilities, especially in the large non-bank financial sector. This highlights the critical need for sustained efforts to bolster financial regulation, both domestically and at an international level, to prevent such vulnerabilities from amplifying future stresses. Additionally, Makhlouf flagged risks tied to US regulatory divergence, cyber and climate threats, all reinforcing the focus on strengthening resilience. As a precaution, the countercyclical capital buffer for banks remains at 1.5 percent.

While risks dominate the current outlook, Makhlouf also emphasized opportunities for Ireland and Europe, including leveraging the Single Market, advancing towards deeper savings and investment unions, and creating new global trade relationships. He expressed optimism that, with strong policy and resilience, Ireland is well-positioned to navigate both the challenges and emerging opportunities of this period of rapid transition.

This review underscores the increasing global risks influencing Irish financial stability and the necessity of persistent vigilance to safeguard the economy amid shifting international dynamics.