It’s almost a tradition now that the day after the European Central Bank (ECB) makes a move on interest rates, the various members of its governing council make public statements justifying the decision and looking at what may come next.
As the governor of the Central Bank of Ireland, Gabriel Makhlouf is no exception. In a blog post published on Friday, he outlined his support for the move, describing the 0.25 percentage point hike as “a measured response” to spiking inflation.
“Energy prices have not faded and, if anything, are proving stickier than previously thought,” he wrote.
For mortgage holders and investors alike, perhaps the most important part of Makhlouf’s post looked at what comes next. He maintained that there is “significant uncertainty to the outlook” for the European economy, and that is almost entirely because of the continuing uncertainty in the Middle East.
He rightly described the Iran war as “a geopolitical driver more than economic one”. Nevertheless it is the key driver and as long as it continues, energy prices are likely to remain high. Brent crude oil topped $107 (€92.16) per barrel on Thursday and remained close to $105 on Friday.
That means higher inflation, but experts traditionally warn to be careful hiking when it’s all because of energy prices and not excessive consumption. Doing so could strangle the economy, especially if it hasn’t been thriving up to now.
That is clearly a concern right now and according to Makhlouf the ECB is “already seeing a tightening of financing conditions”. That’s central bank-speak for the economy is slowing down already. Not good if prices are going to keep rising. That opens the door to stagflation – something of a nightmare scenario for central bankers and anyone who remembers the 1970s era of no growth and runaway prices.
Markets appear to have made up their mind and have priced in three hikes over the next year, with ECB officials reportedly seeing the next one coming as soon as October.
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Still, Makhlouf remains publicly on the fence. There is “no pre-commitment” to a move on rates, he wrote, while he will watch closely “the persistence of the energy price shock, and the extent to which it is showing up in consumer prices, both directly and indirectly; on wage dynamics; and on the transmission of previous moves”.