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Ireland’s top central banker has said rate-setters are facing more uncertainty now than during the early stages of the coronavirus pandemic.
Gabriel Makhlouf told the Financial Times that the outlook for next year was probably clouded by “more uncertainty than there was when we went into lockdown” as the agenda and actions of incoming US president Donald Trump were all but impossible to read.
The president-elect has pledged to impose levies of up to 20 per cent on all US imports, with the tariffs rising to 60 per cent on China, once he returns to the White House on January 20.
Most economists, including those at the European Central Bank, think a US-instigated global trade war would dent growth in the export-dependent Eurozone.
Some analysts think the ECB should cut rates pre-emptively to guard against Trump’s second term in the White House as growth in the Eurozone has been weaker than expected, while inflation is falling quicker than anticipated towards the central bank’s 2 per cent goal.
But, despite the risks, Makhlouf, who holds one of the 26 votes on the ECB’s governing council, said uncertainty was so rampant that “insurance cuts [to interest rates] really may not necessarily help [but] may actually create a different problem”.
Makhlouf warned that it was unclear if Trump was really serious about tariffs, or if his threat was just a bargaining strategy to achieve other policy goals.
While he acknowledged that additional barriers to trade would “not be good for the world”, he said the fallout for growth and inflation was all but impossible to quantify at this point in time. “There are so many caveats [and] so many variables that any scenario analysis risks giving people a wrong sense [that] we understand how all this is going to pan out.”
Makhlouf said that the ECB needed to be “very vigilant”, but argued against calls for the central bank to start cutting rates by 50 basis points at a time at forthcoming meetings in early 2025.
The ECB in December lowered borrowing costs for the fourth time this year by a quarter point. ECB president Christine Lagarde said that further cuts were likely next year and disclosed that some members of the governing council had argued in favour of a 50bp reduction in December.
Makhlouf told the FT his preference was still “for gradual moves rather than big leaps”, unless “the facts and the evidence” suggest otherwise. “I have not seen, and I at the moment do not see, the need for a sudden big leap.”
Makhlouf pointed to the risk that inflation may flare up again if the ECB eased too fast. “We haven’t declared victory [over inflation] yet” as “some elements” of services inflation were still “a bit” concerning.
“We wouldn’t want to complicate our price stability objective by making these sort of insurance cuts,” he said. The ECB could respond when it had “more information” and understood more clearly was Trump’s policies meant for the outlook.
Makhlouf said he expected borrowing costs in the Eurozone to fall to a level where they were neither restricting nor stimulating economic activity — a level often described by economists as the “neutral” rate.
“I couldn’t tell you whether that will be at 2.75 [per cent], at 2.5 [per cent] or at 2.25 [per cent],” he said.
Makhlouf indirectly suggested that the current market consensus that interest rates were to fall to 1.75 per cent by the second half of next year was off the mark. “People who are saying that [the neutral rate is] below 2 are probably ahead of themselves,” he said.
