Gabriel Makhlouf, the Governor of the Central Bank, has said the ECB needs to raise interest rates by a further 50 basis points this month.

Speaking at the Institute of International and European Affairs, Makhlouf said that the high inflation environment is eroding real incomes and threatening economic stability.

He added that ECB's priority is to return inflation sustainably towards it 2% target.

"To continue on our path to bring inflation back to our 2% target, I see a 50 basis point increase in interest rates as the minimum needed at our December meeting," Makhlouf said of the outlook for monetary policy.

“We have to be open to policy rates moving into restrictive territory for a period.  It is premature to be talking about the end-point for policy rates amid the prevailing levels of uncertainty.

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“The justification for the expansion of the balance sheet – too low inflation and the risk of deflation – has ended, and it is time to look at reducing its size.”

Makhlouf spoke about the outsized effect of rising energy prices and food on headline inflation in the eurozone, with energy accounting 3.8% and food 2.8% of inflation of 10% in November.

Non-energy components of domestic inflation, accounting for over one-third of spending, are also very high by historical standards, driven by strong post-pandemic demand meeting constrained supply.

Despite a tight labour market, wage growth lags 4-5% behind inflation, although there is some evidence of second round effects from current inflation into wages.

Makhlouf warned, however, that policy makers should not let inflation expectations stray from the 2% target, arguing that allowing targets to become "dis-anchored" would make regaining control of inflation more difficult.

Preventing such a scenario is one of the reasons Makhlouf has argued for a more forceful monetary policy response.

Highlighting the already significant actions by central banks globally, the Governor said: “The ECB has raised interest rates at an unprecedented pace in order to bring supply and demand back into balance, and return inflation sustainably to our 2% target. 

"The main ECB policy rate has increased from -0.5% in June to 1.5% in October, with further increases likely.”

The ECB has raised the main lending rate from 0% to 2% since July, with Ireland's remaining retail banks all raising mortgage rates in response.

Photo: Gabriel Makhlouf. (Pic: Vivek Prakash/Bloomberg via Getty Images)