The governor of the Central Bank of Ireland, Gabriel Makhlouf, has suggested the European Central Bank "should not hesitate" to increase interest rates if inflation persists.
He warned on Tuesday “we cannot afford to be complacent” about “risks to the inflation outlook”, as he suggested the ECB should be prepared to combat it “if the evidence starts to point to a need for this earlier than we had expected”.
Mr Makhlouf, who sits on the ECB’s governing council that sets monetary policy for the euro area, said the ECB’s view is that inflation, which topped 5 per cent in Ireland in October, should “recede gradually” in 2022.
It has therefore so far resisted increasing interest rates, which would crimp economic growth and push up the monthly cost of most mortgages.
He said the current causes of inflation are known: higher energy prices, a rebound in prices that fell in the initial crisis period of the pandemic, and a rebound in demand that is causing logistical bottlenecks in shipping.
“We believe that those reasons mean today’s inflation is not going to be permanent but I accept that we do not know that to the same degree: the economy may respond in ways we do not expect,” he said, in remarks posted on the Central Bank’s website.
ECB stance ‘correct’
He suggested the ECB’s current stance was “warranted . . . reasonable and, in the present circumstances, correct”.
“However, I also believe that monetary policy should be prepared to respond if the evidence starts to point to a need for this earlier than we had expected. When the evidence changes, we should not hesitate to change our approach,” he said.
Mr Makhlouf highlighted that Irish inflation in 2021 in the rental market is 6.8 per cent and 4.2 per cent in hotels and restaurants, while it is also 4.2 per cent for both categories compared to pre-pandemic pricing.
He also suggested that so-called “onshoring” – where functions that were previously outsourced abroad are brought back closer to home by companies to simplify supply chains – could “put pressure” on inflation. He also warned that policy decisions to fight climate change could also increase inflation.
Mr Makhlouf also suggested Ireland’s economy could move near to full capacity in 2023, and that this could add to inflation pressures here, as he warned that the Government should not overspend in the economy.
