Makhlouf says ECB must react to inflation soon as rate hikes look safer

Central Bank Governor Gabriel Makhlouf said the European Central Bank (ECB) must “act” on inflation and should move to ending quantitative easing as early as next month.

Speaking to Ibec National Council this morning, Mr Makhlouf said current levels of inflation are “worrying” and are hitting low-income households the hardest.

Annual inflation in Ireland hit 7 percent in April – the highest level in more than 21 years, according to the Central Statistics Office. Mr Makhlouf said it would average 6.5 per cent over the course of 2022.

That figure leaves inflation well above the ECB’s medium-term target of 2 percent, Mr Makhlouf said, adding that the Governing Council should scale back its bond purchases in the market by next month or July at the latest.

He said “the era of negative interest rates is coming to an end” and interest rates should be positive early next year.

His comments will add further certainty to the growing consensus that the ECB could start raising deposit rates, which stand at 0.5 percent, over the summer as the bank begins normalizing monetary policy.

Mr Makhlouf also said Ireland’s post-Covid employment performance had been remarkable, surpassing 2019 levels. He predicted that the labor market would continue to tighten.

“This should result in stronger and broader-based wage growth than we’ve seen in recent years,” he said.

However, he also warned that wages were at risk of detaching from underlying productivity growth, which would pose clear risks to the competitiveness of the Irish economy.

He went on to say real wages were likely to fall this year as inflation outpaced wage growth, saying that if wages chased prices it could lead to “higher harmful inflation”.

He said the disinflationary trend that preceded the pandemic is unlikely to return and that he agreed with ECB President Christine Lagarde on demonstrating a commitment to price stability and containing second-round inflationary effects.

Mr Makhlouf said his comments were not forward-looking guidance on ECB policy and that the Governing Council would remain data-driven in its decision-making. Makhlouf says ECB must react to inflation soon as rate hikes look safer

Fry Electronics Team

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