ECB’s Makhlouf: Still Ground to Cover, But Probably ‘Close to the Top of the Ladder’
27 May 2023
By David Barwick – DUBROVNIK, Croatia (Econostream) – European Central Bank Governing Council member Gabriel Makhlouf on Saturday suggested that whilst the ECB was not yet done tightening monetary policy, it was probably near the end of the hiking cycle.
In prepared remarks at the Dubrovnik Economic Conference of the Croatian National Bank, Makhlouf, who heads the Central Bank of Ireland, observed that monetary policy was subject to ‘long and varied lags,’ so that ‘the full effects of our tightening are still likely ahead of us.’
‘In saying that, however, and given our current outlook for inflation, we are likely to be close to ‘the top of the ladder’, so slowing the pace to standard rate steps is appropriate’, he continued. ‘The calibration of monetary policy from here has to remain data-dependent given prevailing uncertainties.’
The ECB’s commitment to restore price stability was however certain, he said. Its efforts to do so were bearing first fruits, he said.
The macroeconomic forecasts due next month ‘will be a useful input in determining the policy prescription’ along with information on the economy and financial conditions, on underlying inflation pressures and on how well monetary policy is being transmitted, he said.
‘The outlook for inflation continues to be too high for too long: this means there is more ground to cover for central banks’, he said. ‘Monetary policy must be brought to levels sufficiently restrictive to bring inflation back to target in a timely manner.’
Inflation was ‘far too high’, but loose fiscal policy was a risk to the effectiveness of monetary tightening, he said. Inappropriate government spending could have negative effects ‘by increasing aggregate demand, but also by signalling that the government is counteracting the effects of policies aimed at reducing inflation, potentially increasing inflation expectations’, he said.
Fiscal policy ‘can also cause great harm by adding to inflationary pressures, which would inevitably call for an even stronger monetary policy response’, he said. ‘Monetary and fiscal policies need to work together to shore up macroeconomic stability.’
At the least, fiscal policy should not directly exacerbate price pressures, he said, but would ideally aim to reduce public debt.