Central Bank of Ireland governor Gabriel Makhlouf has called on European Central Bank colleagues to terminate the ECB's asset purchase programme in June.
Makhlouf (pictured) told IBEC’s National Council today that through Ireland’s economic outlook is good, the current level of inflation is “concerning”.
The CBI boss added: “I am acutely aware of the impacts of inflation on people’s lives and businesses - it affects the whole community, and some more than others.
"We know that those who are disproportionately affected are lower income households, older people, and rural households.
“We have reached the point where we on ECB’s governing council need to act.
In Association with
"Our objective is for inflation to be at 2% over the medium term. Levels are significantly above that now, and it is time for the council to move to end net asset purchases under the asset purchase programme next month or in July.”
According to the CBI governor: “Monetary policy is well-placed to take action to ensure price stability with respect to demand shocks but it isn’t necessarily the best tool to deal with supply shocks. There’s always a risk that economic growth could be slowed unnecessarily. On the other hand, we do need to prevent supply side shocks leading to more persistent inflationary pressures.
“In my view, the disinflationary dynamics that the euro area has experienced over the last decade are very unlikely to return.
“As inflation persists at levels significantly above 2%, it is putting at risk the expectations that we will deliver on our target over the medium term. And as President Lagarde said yesterday, actions that demonstrate our commitment to price stability will be critical to anchor inflation expectations and contain second-round effects.”
Makhlouf added: “The balance of advantage has tilted decisively towards the need for further action, albeit not necessarily at a similar pace to that of other central banks that have also changed their stance, such as the Federal Reserve.
“The differences in underlying inflation dynamics and drivers supports a differential pace. Notably, inflation is more broad-based in the US – something we see in significantly higher core inflation rates – and expectations are more elevated relative to target, and wages are growing at a faster rate.
“The last decade has seen us maintain very accommodative monetary policy and less accommodation is now warranted. Following our decision last December to start the process of normalising monetary policy by ending our pandemic emergency purchase programme (PEPP), we should now move to also end our net asset purchases under the asset purchase programme (APP).”
Not straightforward
Makhlouf told IBEC’s business leader audience that the question of interest rate rises is both more and less straightforward.
“What is clear is that the era of negative rates is reaching its conclusion,” he explained. “What is less clear is the precise path towards normalisation, when exactly rates should start to rise, and when they should stop rising.
“I think it is realistic to expect that the first move in the ECB’s interest rates will happen soon after net asset purchases end, and that rates are likely to be in positive territory by early next year.
"But I should make clear that this isn’t forward guidance: the calibration of our policies should remain data-dependent and we should maintain vigilance, optionality and flexibility as core principles in our decision-making."
