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Makhlouf casts doubt on rate rise as war clouds gather



Gabriel Makhlouf, Governor of the Central Bank.

Gabriel Makhlouf, Governor of the Central Bank.

Gabriel Makhlouf, Governor of the Central Bank.

THE crisis in Ukraine probably won’t keep the European Central Bank from agreeing on a faster wind-down of asset purchases at its next policy meeting, though the prospects for an interest-rate hike are less clear, Central Bank of Ireland chief Gabriel Makhlouf said.

It’s too early to estimate the impact that the conflict will have on the economy, Mr Makhlouf said in an interview in Paris on Wednesday. At the same time, the euro area is recovering from coronavirus restrictions, with consumption increasing and the labour market “in a much more positive state of health”, he said.

“It’s entirely possible that in March we can make decisions as to what happens to the asset purchase program,” he said. “I don’t personally feel that I could tell you what’s going to happen to interest rates, and when. I’d prefer to have a bit more options open to me as we go.” 

Mr Makhlouf spoke before Russian forces attacked targets across Ukraine. President Vladimir Putin’s invasion prompted international condemnation and a US threat of further “severe sanctions” on Moscow, sending markets tumbling worldwide. Ukraine President Volodymyr Zelenskiy imposed martial law.

Sanctions against Russia and the prospect of higher energy prices are adding complexity to the ECB’s efforts to counter surging inflation without hurting the recovery. The institution is expected to sketch out its policy path at its March 10 meeting, when it also presents new economic forecasts.

One possible decision is that asset purchases  which are currently slated to continue at least through October  will end either in the second or third quarter of the year, with the decision “very much” depending on the new projections, said Mr Makhlouf.

That’s roughly in line with views of other policy makers who’ve floated an end to ECB bond buying by the end of September. Slovak Governing Council member Peter Kazimir has proposed August – when trading slows naturally  as a possible end date.

Mr Makhlouf expressed caution when it comes to raising the ECB’s deposit rate, which has been at a record low of minus 0.5pc since 2019. Money markets are currently wagering on a single quarter-point rate hike by year-end compared to two such increases on Wednesday.

“People who think we’re going to be putting up rates soon are operating on a completely different calendar to the one that we’re operating on and that we have announced,” he said, reiterating the ECB’s intention to first end bond buying before adjusting rates.

He favours an approach that gives the ECB the option to wait longer before raising rates. Its current plan is that a first hike would follow “shortly” after bond buying ends – an expression he suggested dropping from the central bank’s policy statement.

“We need to retain optionality as to what we do and when  especially in this world,” he said. “There’s a lot of uncertainty still out there, notwithstanding the trajectory that we’re moving in.”

The suggestion of greater flexibility chimes with a proposal from Bank of France chief Francois Villeroy de Galhau, while Slovakia’s Mr Kazimir also argued in a Bloomberg interview that separating asset purchases and interest rates would free policy makers’ hands.

A key reason for his hesitance to discuss raising borrowing costs are questions on how “durable” current price pressures will be, Mr Makhlouf said. The outlook for wages, which many ECB officials have cited as a key input for their decisions, is also still uncertain.

“I suspect the picture on wages is not going to be much clearer until later in the year,” he said.

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“I can certainly see that by the time we get to June and the September forecast, and the trajectory carries on as it is, that the path toward normalization will become clearer and clearer.”

Mr Makhlouf also dismissed the idea that policy makers need to consider a back-up facility should the gap between euro-area sovereign-bond yields widen as asset purchases are wound down.

“We’ve shown that we can create new tools” and that reinvestments of maturing assets can help offset possible tensions, he said.


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