Makhlouf says a minimum 50 basis point rise in interest rates is needed next week

European Central Bank to meet to agree fourth rate hike this year

Governor of Ireland's Central Bank Gabriel Makhlouf said it was time to look at reducing the ECB's balance sheet.

The governor of the Central Bank of Ireland said a 50 basis point increase in interest rates is required as the minimum needed at the meeting of the European Central Bank (ECB) next week.

Speaking at the Institute of International and European Affairs, Gabriel Makhlouf said it was premature to be talking about the end-point for policy rates amid the prevailing levels of uncertainty.

Following two consecutive 75 basis point increases there has been much speculation as to whether the ECB will agree on a third such increase as it aims to rein in inflation. 

In recent days markets have been pricing in an increase closer to 50 basis points. However, the Governor's comments this morning suggest a 75 point increase is also under consideration.

In his speech, Makhlouf said inflation at between 9% and 10% is "unacceptably high" and was eroding real incomes.

"To continue on our path to bring inflation back to our 2% target, I see a 50 basis point increase in interest rates as the minimum needed at our December meeting."

"We have to be open to policy rates moving into restrictive territory for a period. It is premature to be talking about the end-point for policy rates amid the prevailing levels of uncertainty."

The Governor talked about how two-thirds of headline inflation in the euro area is due to energy (3.8% of 10% inflation in November) and food (2.8%), far above its historical share of around 40%. But not all inflation is due to food and energy price increases. Non-energy components of domestic inflation, accounting for over one-third of spending, are also very high by historical standards, driven by strong post-pandemic demand meeting constrained supply.

"The ECB has raised interest rates at an unprecedented pace in order to bring supply and demand back into balance, and return inflation sustainably to our 2% target. The main ECB policy rate has increased from -0.5% in June to 1.5% in October, with further increases likely.”