ECB’s Makhlouf: ‘Insurance’ Cuts Could Hurt More Than Help; Terminal Rate of 1.75% Too Low

23 December 2024

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Gabriel Makhlouf on Monday said that cutting interest rates as a form of ‘insurance’ could backfire and suggested that rates would not go as low as 1.75%.

In an interview with the FT, Makhlouf, who heads the Central Bank of Ireland, said that ‘insurance cuts really may not necessarily help [but] may actually create a different problem’.

Inflation could resurge if the ECB proceeded too quickly, he said, according to the newspaper. ‘We haven’t declared victory yet’ as ‘some elements’ of services inflation remained ‘a bit’ concerning, he said.

‘We wouldn’t want to complicate our price stability objective by making these sort of insurance cuts’, he said. The FT reported him to have said that the ECB could react once it had ‘more information’ and could better assess the impact of Trump’s intentions.

At the moment, however, the situation was probably one of ‘more uncertainty than there was when we went into lockdown’, he said.

Trade conflict would ‘not be good for the world’, but the impact resisted assessment, he said. ‘There are so many caveats [and] so many variables that any scenario analysis risks giving people a wrong sense [that] we understand how all this is going to pan out’, he said.

Makhlouf again pronounced himself ‘for gradual moves rather than big leaps’, unless ‘the facts and the evidence’ supported the latter. ‘I have not seen, and I at the moment do not see, the need for a sudden big leap.’

Interest rates would be cut to neutral, he suggested. ‘I couldn’t tell you whether that will be at 2.75, at 2.5 or at 2.25’, he said. The 1.75% anticipated by financial markets went too far, he indicated. ‘People who are saying that [the neutral rate is] below 2 are probably ahead of themselves’, he said.