There are “worrying signs” in parts of the European economy, Central Bank of Ireland governor Gabriel Makhlouf has said, a day after the European Central Bank (ECB) cut interest rates for the fifth time since July.
The ECB cut its main interest rate to 2.75 per cent on Thursday, hours after data showed the euro zone’s economy stagnated in the final three months of 2024, while the German economy – the biggest in the bloc – shrank.
Mr Makhlouf made clear the ECB’s governing council is becoming more concerned about a lack of economic growth as inflation moves closer to its 2 per cent target.
“There are worrying signs over growth in parts of the euro area in particular, which are playing a factor in some of our decision making,” Mr Makhlouf said in an interview.
“I don’t think it’s unfair” to say the ECB is now looking more to growth than inflation, he added, although Mr Makhlouf emphasised the ECB’s governing council is still focused on getting inflation down to 2 per cent and in particular how that is feeding into wages and services.
“The trajectory of interest rates is pretty clear but we’re still being careful, and that’s very much in line with my own personal thinking, that we should just take a prudent approach,” he said. “So it’s meeting by meeting.”
[ What does the ECB rate cut mean for borrowers and savers?Opens in new window ]
After Thursday’s cut, markets have priced in two to three rate reductions over the rest of the year, although some economists have suggested there could be as many as five cuts this year. Mr Makhlouf downplayed such a scenario.
“I don’t know if that five includes the one that we did yesterday, but for the sake of argument, let’s say it doesn’t. So that takes you to 1.75 per cent. You can never rule anything out, but I think things will have gone wrong for us to be at those sorts of levels. So that’s not in my head space,” he said.
“The idea that we’re going to go sort of below 2 per cent I find quite hard. Personally, I’m pretty far away from seeing that as the sort of levels of which I’d be comfortable,” he said.
The ECB has long described monetary policy as “restrictive” in its statements, something that investors have taken as a sign that the bank itself sees more room to reduce rates comfortably. Mr Makhlouf however indicated he favours dropping that language when the governing council holds its next monetary policy meeting in March.
“If my view prevails, we’re not going to say that. “We’re going to say this is the ‘appropriate’ rate,” he said, adding that there was still much uncertainty around the economic outlook.
[ ECB will not fully tame inflation this year, European consumers fearOpens in new window ]
That uncertainty is unlikely to be resolved any time soon, with US president Donald Trump’s plans for tariffs and the implications of the US withdrawing from a key global tax agreement front and centre among Irish concerns.
Still, the central bank would have to wait and see what concrete actions are taken by the new administration in Washington, he added, although it reinforces the need for the Government here to broaden the tax base instead of being over-reliant on corporation tax.
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Former Permanent TSB chief executive David Guinane was this week found by a Central Bank-ordered inquiry to have participated in a failure by the bank in 2009 to act in the best interests of certain tracker mortgage customers, breaching consumer protection rules. So far he is the only banker to face sanction in relation to the so-called tracker mortgage scandal.
While Mr Makhlouf declined to comment on the specific case, he did say the central bank is now “in the stage of completing” a lot of historic investigations, while the individual accountability rules are now likely to improve governance across the financial sector and make similar cases less likely in the future.
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