Central Bank governor calls for ‘much faster’ pass-through of rate hikes to borrowers and savers

Central Bank of Ireland governor Gabriel Makhlouf wants to see “much faster pass-through” of central bank rate increases to Irish borrowers and savers, in order for commercial banks to play their role in the transmission of monetary policy to fight inflation.

Speaking to the Oireachtas finance committee on Wednesday, Mr Makhlouf also said that the European Central Bank (ECB) governing council, of which he is a member, is “there or thereabouts” at the top of the interest-rate hiking cycle. However, he cautioned against speculation that it may start cutting rates from next March.

The ECB raised its main lending rate last Thursday by a quarter of a percentage point to 4.5 per cent, the 10th increase it has imposed since July last year, when the rate stood at zero. It is the latest move in the most aggressive series of rate hikes in the bank’s history and comes as it struggles to bring inflation under control across the euro zone.

Irish banks have so far lagged behind peers across the wider euro zone in passing on official rate hikes to households with overnight – or on-demand – deposit accounts, a Central Bank paper published earlier this month confirmed.

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While the three remaining Irish banks have moved to increase fixed-term rates to as high as 3 per cent in the past month, some 94 per cent of Irish household savings are in overnight accounts, earning an average of 0.06 per cent as of July, according to the latest Central Bank figures.

The State’s banks have also been slower than peers across the wider euro zone at passing on rate hikes for new mortgages, it said. The average new Irish mortgage loans was 4.06 per cent in July, up 1.43 points on the year. However, the pace at which Irish and European banks have hiked business loan rates has been stronger than in the last cycle.

Mr Makhlouf said the Central Bank is closely monitoring the transmission of official rate decisions by the banking system, even though it neither has – nor wants – the power to intervene in commercial banks’ rate decisions.

“We very much recognise that this is a challenging economic environment for many people. The community has been facing an unprecedented inflationary shock which has impacted significantly on households’ weekly shop, their tank of fuel and their energy bills, to name but a few issues. In response, the ECB has raised interest rates at an unprecedented pace,” he said.

“If inflation becomes entrenched across the economy, the overall costs to society – including of subsequent actions to bring inflation back to target – will be much larger.”

The Central Bank governor cautioned against speculation among economists and in financial markets that the ECB could start cutting its main interest rates from next March.

“My view at the moment is that March is probably too early,” he said. “People should not be panning on the basis that March should be the start of this.”

The ECB last week suggested rates have now reached their peak and if they are “maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target”.

Euro zone inflation was running at 5.2 per cent in August, down from a peak of 10.6 per cent last October, but still a multiple of the ECB’s 2 per cent target.

“If inflation stays the same, it doesn’t necessarily mean that interest rates will go up. They could just stay where they are for longer,” said Mr Makhlouf.