The ECB may have to dampen growth with “restrictive” interest rates

Interest rates need to rise by at least half a percentage point in December, the central bank governor said.

Abriel Makhlouf said rates may need to “move into restrictive territory”, code for slowing economic growth.

He said Monday at an event at the Institute for International and European Affairs it was also time to “deal” with the shrinking balance sheet of the European Central Bank.

“To continue on our path of bringing inflation back to our 2 percent target, I see a 50 basis point rate hike as the minimum required at our December meeting,” he said.

“Secondly, how far do we have to go in rate hikes in 2023? “We have to be open to key interest rates moving into restrictive territory for a period of time.

“The issues are complex, but the justification for expanding the balance sheet – under inflation and the risk of deflation – has expired and it is time to look at reducing its size.”

The ECB’s interest rate has already risen by 1.5 percent since July, with economists expecting a hike of between 0.5 percent and 0.75 percent at the December 15 meeting.

Mr Makhlouf is seen as one of the ECB’s more “neutral” central bankers, sitting slightly closer to hawks like Germany and Austria, who prefer faster and bigger rate hikes, than to doves like Spain and Italy, who want the opposite.

In his speech on Monday, he said inflation was “well above” the ECB’s target of 2 percent and warned that companies’ own prices, wage increases and “expectations” of further price increases were driving inflation.

Price increases slowed to 10 percent in the euro zone in November from 10.6 percent in the previous month as energy prices cooled.

Irish prices increased by 9 per cent compared to November 2021 compared to 9.4 per cent in October.

Economists say there are signs inflation has peaked but Mr Makhlouf said the spread of price hikes from energy to food and across the economy could push the headline figure higher and push interest rates further higher .

More than 80 percent of items in the CPI are now showing increases of over 2 percent, four times the pre-pandemic level and far higher than a year ago.

“As price pressures spread across the basket, the risk of embedding persistently high inflation increases and the case for tighter monetary policy strengthens,” Mr Makhlouf told the IIEA.

He called for a rethink of the interactions between fiscal and monetary policy and reiterated recommendations for the government to target the most vulnerable in future budgets.

“While protecting vulnerable households from energy shocks is appropriate for both economic and social policy reasons, broad-based measures to support all households will serve to stimulate demand at a time when restraint is warranted.

“This could require a stronger response from policymakers than would otherwise be the case to bring inflation back on target.”

He warned of growing budget deficits in the eurozone and said support now “could only delay demand adjustments to a permanently higher price level or also postpone real wage adjustments into the future”. The ECB may have to dampen growth with “restrictive” interest rates

Fry Electronics Team

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