The European Central Bank (ECB) must not shy away from more interest rate rises if inflation “starts moving in the wrong direction”, a top ECB policymaker said.
Speaking before the ECB’s governing council meets next week, the Central Bank of Ireland governor Gabriel Makhlouf said he felt “uneasy” that inflation in the euro zone was hovering above 3 per cent when economic growth was “slightly stronger” than forecasters had expected it to be before the summer.
In August, annual inflation in the 21-country bloc accelerated to 3.3 per cent, well above the ECB’s 2 per cent target, as energy prices shot up 14 per cent due to the Iran war and disruptions to global energy supplies.
At the same time, gross domestic product (GDP) numbers for the second quarter for Germany have recently been revised upwards and most sentiment indicators have been surprisingly optimistic.
The ECB became the first central bank in the G7 to respond to the Iran war in June when it raised borrowing costs by a quarter point to 2.25 per cent, and it is widely anticipated to lift borrowing costs by a further 25 basis points to 2.5 per cent on September 10.
“The decision we’re going to make next week will not be a surprise to anybody,” Makhlouf said, adding that he expected the ECB would also “slightly” raise its growth forecast for the euro zone this year.
In June, ECB staff trimmed their 2026 growth forecast for the bloc by 0.1 percentage points to 0.8 per cent but subsequent data showed the economy outperformed expectations in the second quarter, expanding by 0.4 per cent.
Euro zone inflation jumps to 3.3%, paving way for ECB rate hike
Makhlouf stressed that even at 2.5 per cent, the ECB’s benchmark deposit rate would still be at a level where it would not slow down economic activity. “Policy is not restrictive,” he said, adding that restrictive territory would start “roughly speaking, once we get above 2.75 [per cent]”.
The ECB should stand ready to move into that territory if there was “a significant shift in an upward direction, in terms of inflation risks”, he argued. “If inflation starts moving in the wrong direction, then we’re going to have to move in that direction.”
For now, however, it is not clear that a further rate rise after next week’s expected move would be needed, he argued, and the ECB should stick to its meeting-by-meeting approach that shuns forward guidance.
Inflation expectations are “in a good place” and there is no evidence of “second-round [inflation] effects in terms of wages”, he said. “We’re seeing risks that are being managed.”
Makhlouf, whose second seven-year term at the helm of the central bank started this month, stressed that higher growth was “not a fluke” as it was driven by investments in AI and defence.
Better than expected GDP growth was “one of the factors that is making next week’s decision really clear cut”, he argued. The case for a rate increase next week might have been “a bit more complicated” if inflation were at 3.3 per cent but “the growth picture was very subdued”, he added. – Copyright The Financial Times Limited 2026