ECB may need to dampen growth with ‘restrictive’ interest rates
Interest rates need to rise by at least half a percentage point in December, the Central Bank governor has said.
Gabriel Makhlouf said rates may have to move “into restrictive territory”, code for dampening economic growth.
He told an event at the Institute for International and European Affairs on Monday that it was also time to “look at” shrinking the European Central Bank’s balance sheet.
“First, to continue on our path to bring inflation back to our 2pc target, I see a 50 basis point increase in interest rates as the minimum needed at our December meeting,” he said.
“Second, how much further do we need to go in terms of interest rate increases in 2023? “We have to be open to policy rates moving into restrictive territory for a period.
“There are complex issues involved, but the justification for the expansion of the balance sheet – too low inflation and the risk of deflation – has ended, and it is time to look at reducing its size.”
The ECB’s main lending rate has already risen by 1.5pc since July, with economists expecting a hike of between 0.5pc and 0.75pc at the December 15 meeting,
Mr Makhlouf is seen as one of the ECB’s more ‘neutral’ central bankers, sitting slightly closer to hawks such as Germany and Austria, who favour faster and larger rate rises, than doves such as Spain and Italy, who want the opposite.
In his speech on Monday he said inflation was “far in excess” of the ECB’s target of 2pc, and warned that firms’ own prices, wage rises and “expectations” of further price hikes were driving inflation.
Price rises slowed in November to 10pc in the eurozone, down from 10.6pc the previous month, as energy prices cooled.
Irish prices rose 9pc, compared to November 2021, down from 9.4pc in October.
Economist say there are signs inflation has peaked, but Mr Makhlouf said the spread of price rises from energy to food and across the economy risks pushing up the headline figure and further driving up interest rates.
More than 80pc of items in the Consumer Price Index are now showing increases over 2pc, four times the number before the pandemic and far higher than a year ago.
“As price pressures broaden across the basket, the risks of persistently high inflation becoming embedded rises, and the case for tighter monetary policy becomes stronger,” Mr Makhlouf told the IIEA.
He called for a rethink of how fiscal and monetary policy interact, repeating recommendations to Government to target the most vulnerable in future budgets.
“While it is appropriate on both economic and social policy grounds to protect vulnerable households from shocks to energy, broad-based measures to support all households will serve to boost demand at a time when restraint is needed.
“This may necessitate a stronger response from monetary policy makers than would otherwise be the case to bring inflation back to target.”
He warned of growing budget deficits in the euro area and said supports now could be “merely delaying demand adjustments to a permanently higher price level, or, equally, postponing real wage adjustments into the future”.
Most Watched
Most Read
- 30 under 30: The young guns of Irish business aiming high
- State microfinance lender found to be in breach of EU aid rules
- Spirit Motor owner doubled profits while taking subsidies
- German regulator fines Carne Group for late document filing
- Aircraft firms sue insurers over losses from Russia sanctions
Latest
- Quarries accused of still producing defective blocks were found to be in line with standards when inspected
- Stella-Lily McCorkindale (5) who died of Strep A infection remembered as ‘bright and talented little girl’
- Declan Bogue Opinion How former Tyrone star Peter Canavan could be The Sunday Game’s version of Gary Lineker
- Wexford students Muireann and Alexandra excel in public speaking competition
- Man (64) shouted abuse at two women tending to horses in Mullaghmore