By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Gabriel Makhlouf on Friday said that policymakers should avoid pre-committing to an interest rate path and instead preserve flexibility amid geopolitical uncertainty, arguing the current stance calls for “patience rather than action.”
Makhlouf, who heads the Central Bank of Ireland, rejected the idea that the latest inflation undershoot means policy is too tight and said risks to the outlook are “two-sided and wide-ranging.”
“If the macro environment continues to evolve in line with our projections,” he wrote, that would be consistent with achieving price stability, but he added that the uncertain geopolitical backdrop makes this a “big ‘if’.”
Against that backdrop, he argued that avoiding precommitment is essential because it keeps the ECB able to respond if inflation were to deviate persistently from target “in either direction.”
“The inflation picture, while improved, remains a patchwork of competing forces,” Makhlouf said, pointing to easing services inflation alongside continued uncertainty around wages.
He said that services inflation is moving closer to a level he views as more consistent with target, but that wage dynamics still require confirmation from “hard data” in the first half of the year after “wage drift” late last year.
Outside services, he pointed to falling energy prices as a key driver of the headline undershoot, while describing goods inflation as weak and food inflation as still above its pre-pandemic average even as recent trends suggest easing momentum.
Addressing whether the headline print implies policy is overly restrictive, Makhlouf said: “On the basis of the current data, combined with the ECB/Eurosystem projections, my answer is no.”
“For me, our data-dependent approach calls for patience rather than action at this stage,” he added, arguing that underlying price pressures are moving in a direction consistent with the target even as wage uncertainty persists.
On the real economy, he described euro area growth as resilient but unspectacular, noting that late-2025 data slightly exceeded expectations and suggesting “some small upside risk” to the December projections for 2026.
He cautioned, however, that growth remains weak by historical standards and that low potential growth—alongside demographics and poor productivity—creates a difficult backdrop for fiscal choices, particularly for high-deficit countries facing rising age-related spending and higher defense needs.
Two macro risks stand out, Makhlouf wrote: that the current inflation undershoot becomes more entrenched, or that growth loses momentum.
On the inflation side, he said long-run expectations remain anchored but emphasized monitoring wage setting closely, pointing to forward-looking information that he said suggests wage growth settling around 3% in 2026–28.
On growth, he warned that trade-policy uncertainty and geopolitical tensions could weigh on investment and employment decisions, adding that the next meeting in March will include updated projections.