Makhlouf backs ‘forceful’ ECB action on interest rates to curb inflation

The European Central Bank (ECB) could increase interest rates above 3.5 per cent, and keep them there for the rest of the year to fight inflation, Central Bank of Ireland governor Gabriel Makhlouf has said.

The ECB raised its interest rates for the fifth time in a row in recent weeks, pushing its main lending rate up by half a percentage point to 3 per cent, a level last seen in 2008, as it continues to fight inflation even amid signs it is easing.

ECB president Christine Lagarde previously said the bank’s governing council intended to increase its main rates by another half point next month – and indicated it would continue to rise beyond then as it focused on bringing inflation back to its 2 per cent target.

The last increase, which was in line with economists’ expectations, was passed on automatically to an estimated 240,000 Irish tracker mortgage loans and prompted AIB to increase its fixed and variable rates. Mortgage brokers predict others will follow.

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Mr Makhlouf, who sits on the ECB’s rate-setting committee, told the Wall Street Journal in Berlin on Tuesday: “I could see [interest rates] being higher than 3.5 per cent. I’m open to acting forcefully to get inflation down to our target.”

Mr Makhlouf also dismissed suggestions the ECB will start cutting rates later this year as inflation declines. “I think that really is going too far,” he said. “We’ll reach a point where we’re going to then plateau.

“I see the ECB as putting up interest rates after the March meeting. Even though inflation is coming down, it’s still way above our target. We should plan for energy disruption from the war to last some time.”

Later, Mr Makhlouf addressed an audience at the Hertie School in the German capital during which he defended the resilience of the European financial system.

“The resilience built-up in recent years has put the European financial system in a stronger and less fragile position,” he said.

“And the evidence to back that up is undoubtedly the response to the pandemic when, put simply, the financial system absorbed the closure of the European economy without a crisis.”

However, he said “everyone would agree” the European macro-financial environment is “characterised by a very high degree of uncertainty, and remains very challenging both domestically and globally”.

“Despite all the progress over the last decade, we have much work to do,” he said. “The financial system continues to change rapidly, in particular through digitalisation and technological innovation.

“The non-bank financial sector and in particular the investment fund sector is playing an increasing role in the financial system, through financial intermediation and links to the real economy.

“The presence of non-bank lenders can bring significant diversification and competition benefits but it can also increase vulnerability to international risks.

“An area that is underdeveloped in my opinion in terms of risk analysis of non-bank finance is systemic risk.”