Central Bank governor casts doubt on early rate cut

Central Bank governor Gabriel Makhlouf warned Ireland’s small export-led open economy is more exposed than others to negative external shocks arising from reduced global trade integration

Central Bank governor Gabriel Makhlouf said other factors could fuel inflation further if they are not managed appropriately. The include investing in housing and climate priorities. Picture: David Creedon

Central Bank governor Gabriel Makhlouf said the European Central Bank (ECB) governing council should remain “open-minded” about the path of interest rates, but suggested it would maintain rate levels for a “sufficiently” long time.

Mr Makhlouf said tighter financing conditions are “dampening demand”, which helping to push down inflation.

At a the most recent meeting of the ECB, its president Christine Lagarde hammered home the message that the central bank is not for cutting interest rates any time soon, but financial markets continue to bet squeezed conditions of the eurozone economy will force it to cut before the summer.

Mr Makhlouf made his comments during his first speech of 2024, at UCC, following a meeting of the Central Bank Commission. The speech focused on Ireland’s economy in 50 years.

He added other factors could fuel inflation further if they are not managed appropriately. The include investing in housing and climate priorities.

He also warned Ireland’s small export-led open economy is more exposed than others to negative external shocks arising from reduced global trade integration.

Mr Makhlouf urged caution about the “excessive” relaxation of State aid rules, arguing it would create competitiveness challenges to the Irish economy and a “threat to its ability” to attract continuing high levels of inward foreign direct investment in a more “fragmented global trading environment”.

“This further points to the importance of improving the productivity and competitiveness of the economy to ensure it can deliver sustainable economic growth for the community as a whole over the longer term,” he said.

Mr Makhlouf’s speech puts the spotlight back on the precariousness of global supply chains amid the recent attacks on shipping in the Red Sea.

Meanwhile, the governor said Ireland’s ageing population had created additional challenges for policymakers, but said “strong” tax revenues would make the transition to an older population structure more manageable and less costly.

Mr Makhlouf said “it is clear” Ireland’s infrastructure in housing and other areas has not “kept pace with the growth in population”. 

“This may be reducing labour supply by discouraging much needed inward migration. In addition to additional investment, there is an important role for policy in improving the planning, development and delivery of infrastructure at scale,” he said.

Mr Makhlouf said these transitions and challenges “undoubtedly presents Government and policymakers with a tough task”.

However, the head of the Irish banking regulator recommended that the Government recommits to compliance with its 5% net expenditure rule when setting its budgetary plans.

“Given the known demands on public resources that are emerging, it may be prudent to consider introducing measures that would contribute to increasing Government revenue as a share of national income and broadening the tax base, in line with the recommendations of the Commission on Taxation,” said Mr Makhlouf.