ECB needs to act on interest rates, Central Bank governor says

Makhlouf adds voice to growing clamour for July ECB rate hike

Central Bank of Ireland governor Gabriel Makhlouf has joined growing chorus of policymakers indicating that European Central Bank (ECB) is on track to hike interest rates for the first time in a decade in July, in order to combat soaring inflation.

Mr Makhlouf also said that the deposit rate, the focus of the ECB’s attention and currently at minus 0.5 per cent, is likely to be “in positive territory by early next year”.

He did not give a view on the ECB's refinancing rate, which has been at zero since 2016 and is a key benchmark used for bank lending rates. Tracker mortgages are based off the refinancing rate.

“What is clear is that the era of negative rates is reaching its conclusion. What is less clear is the precise path towards normalisation, when exactly rates should start to rise and when they should stop rising,” Mr Makhlouf said at an an Ibec national council meeting on Thursday.


“I think it is realistic to expect that the first move in the ECB’s interest rates will happen soon after net asset purchases end and that rates are likely to be in positive territory by early next year.”


The reference to net asset purchases refers to bond-buying in the market under the ECB’s quantitative easing programme. Mr Makhlouf said that net bond-buying under the asset purchase programme, which commenced in late 2014, should end “either next month or in July”.

The stock of bonds held by euro-zone central banks on behalf of the ECB under its asset purchase programme stood at almost €3.39 trillion at the end of April. Meanwhile, bond-buying under the ECB’s pandemic-related €1.85 trillion stimulus programme ended in March.

“From here, I think we need to consider the implications of operating with a large central bank balance sheet as we continue the normalisation journey. There also needs to be a careful assessment and monitoring of reinvestments and possible side effects on market functioning,” he said.

ECB president Christine Lagarde moved on Wednesday to throw her weight behind the notion of the bank moving in July, saying that a rate hike could come "a few weeks" after net asset purchases came to an end. The focus is on the bank's scheduled governing council meeting on July 21st.

Borrowing costs

Most other major central banks have already raised borrowing costs but the ECB, which had fought too-low inflation for a decade, is still pumping cash into the financial system via bond purchases.

Inflation hit 7.5 per cent in the euro zone last month and even measures that strip out food and energy prices rose above the ECB’s 2 per cent target.

ECB board member Isabel Schnabel said last week that the ECB needed to act now to protect its credibility and stop inflation expectations spiralling out of control.

The number of ECB policymakers calling for a rate hike over the summer has been growing in recent days, including ECB board member Frank Elderson, French central bank governor François Villeroy de Galhau and Bundesbank president Joachim Nagel.

Mr Makhlouf said that while the Irish economic outlook remains "good", the current level of inflation is "concerning". Figures published on Thursday by the Central Statistics Office showed that the annual rate of Irish price growth was running at 7 per cent in April, the fastest in decades, driven by higher energy, fuel and grocery prices.

“I am acutely aware of the impacts of inflation on people’s lives and businesses. It affects the whole community, and some more than others,” the Central Bank governor said. “We know that those who are disproportionately affected are lower income households, older people and rural households. We have reached the point where we on ECB’s governing council need to act.”

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times