Makhlouf: Central Banks have lost a 'degree of trust' with the wider public

Central Bank governor said central banks around the world should explain their decisions on monetary policy as the ECB continues to hike interest rates

Central Bank governor Gabriel Makhlouf said more should be done to explain decisions to the public. Picture: Vivek Prakash/Bloomberg

Central banks have lost a “degree of trust” with the general public due to not explaining properly their reasons for certain decisions, such as rising interest rates, governor of the Central Bank of Ireland Gabriel Makhlouf has said.

Since July last year, the European Central Bank (ECB) has raised interest rates by 3.75%, with more hikes expected in the coming months. Mr Makhlouf is also a governing council member of the ECB.

On Tuesday, Mr Makhlouf spoke at a conference where he was asked if he believed central banks around the world are trusted given the importance of trust when it comes to setting monetary policy. The question was posed by Cleveland Federal Reserve president Loretta Mester.

In response, Mr Makhlouf acknowledged central banks have “lost a degree of trust” with the public by not explaining themselves and their decisions properly. It comes as the ECB continues to hike interest rates as it continues to try and get a handle on inflation.

He added it did not affect the way he thinks about monetary policy but he feels like they should be explaining their decision-making more to people.

We need to be explaining what we're seeing and why we're making the judgments we are, and we need to talk to people and communities in a language they understand and I think in the end that's how you rebuild trust. I think we can do it as central banks."

During his speech at the conference, Mr Makhlouf warned fragmenting global trade could lead to “significant effects on inflation”, including increasing volatility which in turn could lead to future rate hikes.

He said this was because changes in global trade patterns and shifts in supply and demand could lead to sudden and unpredictable changes in the price of goods and services.

“This can make it difficult for central banks to manage inflation and may require them to adjust interest rates more frequently or aggressively than they would otherwise.” 

Mr Makhlouf noted there had been a narrative going around that countries would be better off reducing their exposure to possible foreign shocks by taking back production that had moved overseas as a result of globalisation.

He added the IMF and other international institutions are warning that there are potentially “considerable negative effects” from a fragmentation of trade along geopolitical lines and various studies have shown that “the deeper the fragmentation, the larger the cost”.

"If there is a severe fragmentation that also affects technological diffusion, the loss of economic output is substantial at between 8% to 12% in some countries.”