ECB officials say it is 'far too early' for interest rate cuts

Central Bank governor Gabriel Makhlouf told conference it was too early to say 'we've sort of reached the top of the ladder' when it comes to dealing with inflation

Central Bank of Ireland governor Gabriel Makhlouf speaking at the Financial System Conference. Picture: Leah Farrell /RollingNews.ie

Central Bank governor Gabriel Makhlouf has said it is “far far too early” to start talking about reducing interest rates as inflation is still high and needs to be returned to the medium-term target of 2%.

The latest flash estimate from the EU shows annual inflation in October across the eurozone dropped to 2.9% from the 4.3% recorded in September, driven by a fall in energy prices.

During the last meeting of the European Central Bank (ECB) last month, the decision was made not to increase interest rates further, following 10 straight interest rate increases.

Speaking at the Financial Systems Conference in Dublin, Mr Makhlouf, who is also a member of the Governing Council of the ECB, said: “It is far, far too early, in my view, to start talking about when we are going to start reducing or cutting rates.”

He also said it was too early to say “we've sort of reached the top of the ladder” when it comes to dealing with inflation.

Mr Makhlouf added he did not know if the world was going back to low rates as there are “too many variables”.

Martins Kazaks, governor of the Central Bank of Latvia and member of the ECB Governing Council, said borrowing costs could be reduced once the ECB was sure consumer-price gains are headed back to the 2% target.

“This decision right now to keep rates at current levels is to be really convinced inflation won’t rise again,” Kazaks told Latvia’s TV3 on Wednesday. 

“We have to be convinced that inflation has been beaten, then we can step by step lower rates,” he said.

The ECB is due to meet again next month to discuss the inflationary environment and whether to continue to leave rates where they are.

Bundesbank president Joachim Nagel said the discussion on when interest rates should be cut was“not helpful”. 

He added "inflation is a greedy beast” and “when we have to deal with a beast that is so stubborn, we have to be even more stubborn”.

ECB chief economist Philip Lane said there had been some progress on underlying inflation but it was not yet enough.

Speaking about the Irish economy, Mr Makhlouf said it had continued to expand, albeit at a slower pace, as “monetary policy is taking hold domestically and globally”.

“Early signals of the impact of inflation and monetary tightening on borrower resilience are becoming visible among tracker mortgages, personal loans, and certain corporate lending segments,” he said.

He added the broad macro picture shows a “resilience in the economy” but “there is huge uncertainty as to what lies ahead”, due in large part to monetary tightening that has yet to be passed through to the financial system and to the economy.