‘Far, far too early’ to talk about ECB rate cuts, says Central Bank governor

It is “far, far too early” to start talking about when the European Central Bank (ECB) might start cutting interest rates, Central Bank governor Gabriel Makhlouf told a conference in Dublin on Wednesday. His comments came after the institution’s governing council, of which he is a member, decided last week to keep official euro zone rates on hold after 10 successive increases.

“And, also, it is too early to declare that we have reached the top of the ladder [of rate hikes], to use a phrase,” Mr Makhlouf added. He told reporters on the fringes of the Central Bank-hosted conference that while a drop in euro zone headline inflation to 2.9 per cent last month from a record-high 10.6 per cent a year earlier was “very pleasing”, core inflation “remains a challenge”.

Separately, Bank of England governor Andrew Bailey said that it was “really too early” to talk about UK rate cuts and that there are still “upside risks” to official borrowing costs rising if, for example, if events in the Middle East push up energy costs.

Mr Bailey also used his address to the conference to say he hopes to see further close co-operation between the UK and the Republic on regulating investment funds, in order to limit financial stability risks and market fragmentation following Brexit. Many investment funds operating from London are also domiciled in Dublin, one of the largest European fund hubs.

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While Mr Bailey said that he has no position on Brexit “per se”, as a public official, he noted: “It has led to a reduction in the openness of the UK economy, though over time new trading relationships around the world should, and I expect will, be established. Of course, that requires a commitment to openness and free trade.”

Earlier, Mr Makhlouf said the Central Bank plans to set up a regulatory “sandbox” to allow financial and technology firms to test innovative products in a safe environment before launching them on the market. The move comes almost a year after the Department of Finance said in a report on the banking system that the regulatory body should review its existing innovation hub and consider setting up a sandbox programme – similar to one offered in some other countries, such as the UK – to allow companies to test new products in a live setting.

[ ECB must keep rates at or near 4% until 2024 to get inflation down, warns IMF ]

“Many of you have called for us to establish a sandbox. We have listened and we will do this,” Mr Makhlouf told conference attendees.

A consultation paper on the plan as well other efforts to develop the Central Bank’s existing so-called innovation hub was launched on Wednesday. Interested parties have until February 8th of next year to make submissions.

The Central Bank set up its innovation hub in April 2018 to allow both start-ups and existing financial firms to engage with regulators as they develop financial innovations based on new technologies outside the formal supervisory process. Some 375 such engagements have taken place over the past 5½ years.

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However, there have been calls from various parties in recent years, including fintechs and the Competition and Consumer Protection Commission (CCPC), for the Central Bank to set up a full-scale regulatory sandbox scheme.

A sandbox system would allow regulators to “closely monitor and assess the potential risks and benefits while providing guidance and clarity for the firms involved”, the consultation paper said.

“Typically, the aim of sandboxes is to allow regulators and firms better understand the opportunities and/or risks posed by innovations, which may be monitored through a testing phase.”

Mr Makhlouf also indicated the regulator would defer implementing its individual accountability regime for non-executive directors by 12 months. The deferral would “enable both the Central Bank and regulated firms to learn from the introduction of the new framework to executives in the first instance as well as how we will use the framework to inform our supervision”, he said.