Makhlouf expects ECB to lift interest rates by minimum of 0.5% at its December meeting

Central Bank of Ireland governor Gabriel Makhlouf says he expects the European Central Bank (ECB) to hike its key interest rate by at least 50 basis points or 0.5 per cent at its December meeting.

Speaking at the Institute of International and European Affairs in Dublin, he said that an inflation rate of 9-10 per cent in Ireland and in the euro zone was “unacceptably high”.

This level of price growth was eroding real incomes and threatening economic resilience, Mr Makhlouf said.

“To continue on our path to bring inflation back to our 2 per cent target, I see a 50 basis point increase in interest rates as the minimum needed at our December meeting,” he said.

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On a €200,000 mortgage over a 25-year term, a rate increase of 0.5 per cent would mean an increased monthly repayment of about €50 per month.

With euro zone inflation dropping from 10.6 per cent to 10 per cent in November, there has been speculation that the ECB may slow or even halt its schedule of rate increases.

However, the governor warned that it was premature to be talking about an end point for policy rates given the prevailing levels of uncertainty.

“We have to be open to policy rates moving into restrictive territory for a period,” he said.

[ Irish inflation slows to 9% as prices ease in wider euro zone ]

“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,” he said.

The ECB increased interest rates by 0.75 per cent to 2 per cent in October in a bid to tackle soaring inflation across the bloc. Markets have priced in further increases in the coming months. The bank’s governing council is due to meet again on December 15th.

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“Supply chain disruptions, a rapid and strong post-pandemic rebound in demand, and war-related energy and food price shocks are contributing to unacceptably high levels of inflation in Ireland and the euro area,” the governor said, noting some euro area countries were experiencing inflation above 20 per cent, in part because of a greater exposure to Russian energy imports.

Mr Makhlouf said about two-thirds of headline inflation in the euro area was due to energy and food, far above its historical share of about 40 per cent.

“But not all inflation is due to food and energy price increases. Non-energy components of domestic inflation, accounting for over one-third of spending, are also very high by historical standards, driven by strong post-pandemic demand meeting constrained supply,” he said.

[ It is a measure of the strange economic times that we are living through that a euro zone inflation rate of 10 per cent – and an Irish rate of 9 per cent – can be greeted as positive news. ]

While that there was some evidence of second round effects from current inflation into wages, he said wage growth of 4 to 5 per cent still lagged inflation.

“Inflation expectations, have moved up alongside headline inflation. We need to watch closely for warning signs of inflation expectations moving away from our 2 per cent target,” he said.

“Were expectations to become ‘dis-anchored’ in this way, it would make the task of sustainably returning inflation to our 2 per cent target far more difficult, and preventing it is one of the reasons for the forceful monetary policy response,” he said.