'Absolutely necessary' to raise interest rates to tame inflation - Makhlouf

Gabriel Makhlouf: 'history has taught us that these issues will only be exacerbated if we delay action.'

The Governor of the Central Bank has said it is "absolutely necessary" for the European Central Bank (ECB) to raise interest rates.

Speaking in Dublin yesterday, Gabriel Makhlouf said a pivot to further tighten monetary policy has been necessary, as "history has taught us that these issues will only be exacerbated if we delay action".

"Raising interest rates is absolutely necessary as persistent inflation is damaging to macroeconomic stability and the community’s longer-term living standards," he said.

The governor's comments come in the wake of two rate hikes by the ECB in the face of persistent and elevated inflation. A third rate hike is expected next month following last week's historic 75 basis point increase. ECB members have been more hawkish in their statements recently underlining the importance of reducing inflation.

"By ensuring that inflation returns to the target of 2% over the medium term, the recent monetary policy actions by the ECB can contribute to alleviating the drag on households’ real income and create the conditions for a return to sustainable growth and improved living standards."

The ECB's Chief Economist Philip Lane has said the large rate hike last week was "appropriate" but hinted that future increases would be smaller.

“We expect that this transition will require us to continue to raise interest rates over the next several meetings,” Lane said. “The appropriate size of an individual increment will be larger, the wider the gap to the terminal rate and the more skewed the risks to the inflation target.”

It is expected the October rise will be at least 50 basis points but could also be a repeat of the September increase to match the US Federal Reserve's recent aggression.