Irish Central Bank chief Makhlouf: Time for ECB to act over interest rates

Gabriel Makhlouf: 'We have reached the point where we on the ECB’s Governing Council need to act.'

Central Bank governor Gabriel Makhlouf has become the latest policy maker to say that the ECB will need to start to increase interest rates to fight inflation.

Speaking to an Ibec meeting, the governor said that inflation across the eurozone had reached a level that required a response from the ECB.

“We have reached the point where we on the ECB’s Governing Council need to act,” Mr Makhlouf told the business group.

“Our objective is for inflation to be at 2% over the medium term - levels are significantly above that now, and it is time for the council to move to end net asset purchases under the asset purchase programme next month or in July,” he said.

Several policymakers on the ECB have already said that interest rates will need to rise soon after the central bank starts ending its huge bond-buying programme that kept interest rates at record low levels across the eurozone for years.

The US Federal Reserve and the Bank of England had started to hike interest rates as inflation surged in recent months. Irish consumer price inflation reached 7% in April, according to new CSO figures.

Mr Makhlouf pointed to the cost pressures caused by the Covid-19 lockdowns in China and the war in Ukraine with the economic fallout “being felt across Europe through higher inflation, as well as greater uncertainty and negative sentiment effects”.

“Ireland will feel these effects, albeit not as directly as some other in our trading partners,” he said.

He said there was a risk that strong employment growth in Ireland could add to the price pressures should wages increase rapidly and become “detached from underlying productivity growth”.

“The question of interest rate rises is both more and less straightforward. What is clear is that the era of negative rates is reaching its conclusion. What is less clear is the precise path towards normalisation, when exactly rates should start to rise and when they should stop rising,” Mr Makhlouf said.

“I think it is realistic to expect that the first move in the ECB’s interest rates will happen soon after net asset purchases end and that rates are likely to be in positive territory by early next year,” he said.