Governor of Irish Central Bank backs further interest rate hikes to tackle inflation

The European Central Bank needs to continue to increase interest rates when its Governing Council meets in Frankfurt next week, according to the Governor of the Irish Central Bank.

Speaking during an appearance before the Joint Oireachtas Committee on Finance, Public Expenditure & Reform and Taoiseach on Wednesday afternoon, Gabriel Makhlouf said rates need to be increased by another 0.5% next week and by a similar scale at its March meeting.

"The sharp increase in the cost of living over the past year has resulted in an erosion of living standards. High inflation can also lead to lower investment, harming future growth and economic potential. And the impact of inflation has not been felt uniformly across the population with the groups most impacted being those that spend more of their income on energy and food, such as lower-income households," he said

Mr Makhlouf said a return to price stability – that is, a rate of inflation in-line with our 2 per cent target over the medium term – is necessary for a stable economic environment to support long-term growth.

"As interest rates are the primary tool to fight inflation, my colleagues on the ECB’s Governing Council and I started raising our key policy rates in July last year. These are now at 2 per cent. Our primary mandate is price stability and we are determined to achieve our inflation target by aligning aggregate demand more closely with aggregate supply conditions in the euro area economy as a whole. 

"Raising the policy rate also signals our commitment to price stability. It sends a clear message that we will not allow inflation to stay above 2 per cent and helps to contain inflation expectations, guarding against the emergence of self-reinforcing inflation dynamics and tackling the risk of a persistent increase in inflation expectations.

"We need to continue to increase rates at our meeting next week – by taking a similar step to our December decisions – and also at our March meeting, although our future policy decisions need to continue to be data-dependent given the prevailing uncertainty," he said.