Central Bank head Makhlouf rejects claim that Irish banking market is 'dysfunctional'

Speaking to the 'Irish Examiner', Gabriel Makhlouf discusses the timing of rate rises and cuts, competition in Irish banking, the danger of stoking up inflation, and factors behind Ireland's housing shortage

The Oireachtas had taken away some of the powers of the Central Bank in the past. Picture: David Creedon

Central Bank governor Gabriel Makhlouf has said he is “completely open-minded” on the path of interest rates, but that financial markets for the past while “have been running away with themselves”, regarding the prospects of an early cut by the European Central Bank.

The comments of central bankers are being closely monitored amid global market bets that the European Central Bank (ECB) is poised to declare a victory over inflation, by sanctioning its first cut since it started aggressively hiking rates 18 months ago.

That decision would have significant implications for struggling households and businesses, not least for tracker mortgage holders and for an estimated 70,000 households whose fixed-rate home loans expire this year.

Markets look to rate cuts this spring

Markets in recent weeks have tempered their expectations for an early rate cut, but nonetheless are still looking toward key dates in March, April, or May when the ECB will have a slew of new forecasts and data on underlying inflation pressures in the eurozone.

In a wide-ranging interview with the Irish Examiner, Mr Makhlouf discussed decision-making over the timing of any rate cut, the state of competition in Irish banking, the potential dangers of the Government stoking inflation by pumping up spending, and his views on the factors behind the acute housing shortages.

The governor said the ECB would keep interest rates unchanged if the new data did not support the case that inflation had been reined in.

Sticky core inflation

“What we are seeing is that core inflation — that’s headline inflation minus energy and food — actually is a little stickier and has not moved as much as ideally we would have liked, but headline [inflation] is definitely falling,” he said.

Eurozone wages data, which will not be available before April or May, would give the ECB “a better handle” on price pressures.

He said that, although important in their own right, the projections would not automatically lead to a decision over rates.

In terms of the ECB inflation goal, “if the numbers are telling us ‘you are not getting there’ , then we are just going to carry on staying where we are”.

Markets 'running away with themselves' 

On the prospects for an early rate cut, Mr Makhlouf said markets for a while “have been running away with themselves”.

Asked what conditions would need to apply for him to cast his vote on the ECB governing council for a rate cut before the summer, the governor said that he would want to see evidence about the labour market and “what is happening to wages”.

“The labour market is still very robust. It has been pretty resilient. That’s a factor,” he said.

“We have got these risks around the place and we are going to see how they play out. 

The most obvious risk right now is what is happening in the Middle East and its potential impact on energy, but also on supply chains.

"At the moment it has not been significant, but it is one of these risks,” the governor said.

“I’ll be looking at the risk environment”, as well as assessing whether core inflation is “actually moving or is just continuing to be sticky”, he said.

Understanding what is happening to services inflation — which is very much linked to wages — would be important for him, the governor said, because the reason core inflation was staying “sticky” was mainly due to services inflation.

No signs of recession

Asked whether keeping interest rates too high for too long increased the risks of the ECB doing more harm than good, Mr Makhlouf said although people had been predicting a recession for almost a year — the eurozone was not heading into a recession.

The labour market, which he said “is pretty resilient”, provided some evidence about the economy.

He said that he was “completely open minded” on the path of interest rates. “If the data tells me that ‘you might as well make a move in March’, I’ll say: ‘Let’s make a move.’

“If the data tells me ‘you better wait’ and it turns out that I am waiting until September, or October, or whatever, then we’ll wait,” the governor added.

The interview took place earlier this week, before the conclusion of the meeting of the US Federal Reserve.

Asked about the decision-making at the Fed over the potential for a US rate cut, Mr Makhlouf said that the US central bank has a slightly different mandate and that comparing the ECB with the Fed was too simple a comparison to make.

The governor, deputy governors, and the Central Bank Commission were visiting Cork as part of Mr Makhlouf’s outreach programme to meet and hear the views of businesses.

Banking in Ireland 

In the interview, the governor rejected the suggestion that the consolidation of more of the market into the hands of three lenders — AIB, Bank of Ireland, and PTSB — meant the banking market for households and businesses was dysfunctional. 

The exit of Ulster Bank and KBC from Ireland has led to significant amounts of mortgage and corporate loans transferring to the three main lenders.

The Competition and Consumer Protection Commission (CCPC) has, in the past, called for the Central Bank to take on more powers over competition in Irish banking.

The Oireachtas had taken away some of the powers of the Central Bank in the past.

“Just to be clear, I think the Central Bank does have a role — and it is also in legislation — to make sure the regulations it introduces are in line with a well-functioning financial system and a market,” he said.

“However, the CCPC exists to regulate competition. Part of the job of the Central Bank is to work with the commission.

Firstly, I don’t really accept it is dysfunctional. I think that is unfair on the banks. It is unfair on consumers, who ultimately are the critical people here to say it is dysfunctional.

“The system is working.

“The question is whether it could work better and whether we are attracting new entrants into the market.

“I think what we are seeing is that there are new entrants coming in, in a small scale. The reason the two banks left, or are in the process of leaving, is to do with them and their own judgements of the judgements of their parents as to where they wanted their capital to be,” he said.

It would be better to have more than three major domestic banks, the governor said.

He added that he could see the commission wanting to do a review of retail banking competition.

However, any such move does not imply that the banking market here is dysfunctional, he said.

He added that the banking industry was facing big changes in the way it operates.

On housing, Mr Makhlouf rejected suggestions that the mandate of the ECB could be fine-tuned in order to help shape monetary policy for European countries, such as Ireland, that are grappling with chronic housing shortages.

Mr Makhlouf said the ECB’s objective over price stability was based on solid ground and any changes, “in a fragmented way”, would be unsustainable.

Many builders are struggling with high interest rates, making it more difficult for some companies to raise finance, analysts have said.

In addition, the Economic and Social Research Institute (ESRI) has warned that the economy could be affected by a fall in investment — hitting areas such as commercial property.

Last month, Ryanair stirred up a controversy after it emerged it had bought houses to accommodate some of its staff.

Mr Makhlouf acknowledged that more housing was being built, but still not at the required levels to meet demand.

He said Ryanair was not the first business to have bought accommodation for employees.

Firms needed homes for their staff to sustain growth in the economy, and “those people are going to need somewhere to live”, he said.

Asked if his warning this week over the Government breaching its 5% budget spending rule reflected any increased fears that the Coalition would ramp up spending in a probable election year, Mr Makhlouf said the Central Bank had been consistent with the same message in previous years.

The warning was not being repeated this time because of the possibility of an election, he said.

“At the end of the day, it matters. It matters particularly in a monetary union, where monetary policy is set for the whole area, that in Ireland — where we are operating basically at capacity — we don’t make our inflation challenges worse,” he said.

ECB helped Europe through a time of extraordinary shocks

Asked to rate the performance of the ECB over recent crises, Mr Makhlouf said that — as one of the decision-makers — his view was “distorted”.

However, he said he was proud of the ECB’s role in helping to take Europe through a “once-in-a-lifetime pandemic, a war, and there were some shocks that have been extraordinary”.

He said he was enjoying the job, was “very proud to lead the people at the Central Bank of Ireland”, and is committed to seeing his seven-year term through.