Gabriel Makhlouf: Staying the course - monetary policy to avoid persistent inflation

Remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the Markets News International event, London, 4 April 2023. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

Good afternoon. 

The title of my talk today – 'Staying the course – monetary policy to avoid persistent inflation' – reveals much about my current views on inflation and the near term path for monetary policy. 

The latest data suggest that the direct effects of the supply shocks we have seen over the last two years are gradually fading.  We see this in the declining rate of headline inflation in recent months. 

However, indirect effects are still working their way through the economy as the input price increases we saw last year pass through more slowly into core inflation, and domestic cost pressures emerge in the form of wages and profit margins.  Monetary policy must ensure that this does not become a source of persistent inflation above our 2 per cent target.

To achieve this, the Governing Council decided last month to increase the three key ECB interest rates by 50 basis points.  The interest rate applied to our Deposit Facility is now at 3 per cent, up from minus 0.5 per cent last July. This represents a significant tightening of the monetary policy stance, commensurate with the challenges to price stability we have been facing.

The scale and pace of interest rate increases – up 3.5 percentage points in just nine months – is unprecedented.  For comparison, previous rate hiking cycles in the euro area in 1999-2000 and 2005-07 saw rates rise by 2.25 and 2 percentage points over a 13 and 21 month period, respectively.

Today I will highlight my view on the key factors that will influence the future path of monetary policy.  They include both the data I am monitoring, and how I react to this data when making policy decisions.