Ireland’s Central Bank governor and European Central Bank (ECB) policymaker Gabriel Makhlouf said he favours “gradual” interest rate reductions “over large moves” in the coming quarters.
“The disinflation process remains on track, allowing us to reduce rates,” he said in a blog post published to the central bank’s website in the wake of the ECB’s latest quarter point rate reduction. “Although we have not committed to a particular rate path the direction of travel on interest rates is clear.”
However, he insisted the exact pace of further rate cuts “would depend on inflation out-turns continuing to move in line with our projections, as well as wider developments in the euro area economy”.
There had been speculation in advance of Thursday’s ECB meeting that Frankfurt policymakers might opt for a bigger half-point cut to boost the flagging euro zone economy and with the threat of tariffs now hanging over Europe’s sizeable trade with the US.
“The economic outlook remains subject to a lot of uncertainty,” Mr Makhlouf said. “In particular, a rise in geopolitical tensions – from ongoing conflicts or a change in the environment for international trade – could have adverse effects for the euro area economy.”
He described the outlook for Europe as mixed with better-than-expected economic data for the third quarter – in part from a one-off Olympics boost – offset by underlying weaknesses.
Mr Makhlouf said the steady pace of growth in the Irish economy in 2024 had given rise “to concerns over potential infrastructure bottlenecks that constrain sustainable growth”.
The Central Bank will publish updated economic forecasts for the economy here next week.
In his blog published Mr Makhlouf pinpointed services sector inflation as a flashpoint area. He warned that services inflation was “taking longer to fall back to pre-pandemic norms, hovering around 4 per cent in the euro area for all of 2024″.
The services sector, which includes everything from hotels and hairdressers to IT firms and telecoms, typically accounts for two-thirds of economic activity in developed economies. Inflation in the sector here and across Europe has proved more stubborn to rein in because workers have been demanding higher wages to compensate for cost-of-living pressures.
“However, with some components of inflation still too high for comfort – notably services inflation – I continue to favour a gradual reduction in rates over large moves,” Mr Makhlouf said.
Several ECB policymakers on Friday indicated that more interest rate reductions were on the way, with France’s Francois Villeroy de Galhau saying investors’ bets on more than 100 basis points of easing look reasonable.
“There will be more rate cuts next year, more rate cuts plural,” he said on BFM Business television on Friday. While the central bank is not pre-committed to a specific rate trajectory it is “rather comfortable with financial markets’ forecasts”, he said.
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