ECB’s Makhlouf: 50bp Hike Is Minimum Needed at Our December Meeting
5 December 2022
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Gabriel Makhlouf on Monday said that the ECB should hike interest rates this month by at least 50bp.
In a speech at the Institute of International and European Affairs in Dublin, Makhlouf, who heads the Central Bank of Ireland, noted the ECB’s tightening steps to date, ‘with further increases likely.’
‘[T]o 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’, he said. ‘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.’
Makhlouf said that in general he would elaborate on the subject of quantitative tightening in the future, but wished to make one comment now, namely that ‘[t]here are complex issues involved, but 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.’
In December, he said, citing ECB President Christine Lagarde, the Governing Council would ‘lay out the key principles for reducing the bond holdings in our asset purchase programme portfolio in a measured and predictable manner.’
Price pressures had become more broadly based, heightening the risk that inflation would become entrenched and arguing more strongly for tighter monetary policy, he said.
‘High current inflation rates could give rise to more persistent inflation if they lead to inflation expectations rising significantly above our 2% target’, he said.
A forward-looking indicator of wage growth yields a result close to euro area core inflation, now at around 5%, he said. This is in the context of a job market that ‘continues to look very tight, despite the weakening growth outlook’, he said.
However, the growth rate of 5% measured most recently ‘likely represents an upper bound for the growth rate of average wages across the economy’, he said.
With respect to inflation expectations, the percentage of forecasters expecting medium-term HICP above 2.5% has risen, he said, ‘a development that needs closely monitoring if, as some have suggested, it could be an early warning sign of inflation expectations moving away from our 2% target.’
‘Were expectations to become “dis-anchored” in this way, it would make the task of sustainably returning inflation to our 2% target far more difficult, and preventing it is one of the reasons for the forceful monetary policy response’, he said.
The need to hike official borrowing costs has been and remains clear, he said, even if the ECB at this point also has to assess and take into account the impact of those hikes.
‘With headline and core inflation at 10 and 5% in the euro area, there is clearly more work for monetary policy to restore price stability’, he said. ‘So we will take our next decisions meeting-by-meeting for the time being.’