Joint Oireachtas Committee on Finance
Speaking at the Committee, Governor Makhlouf said: “Looking back on 2022, the factors dominating economic activity included Russia’s unjustified war against Ukraine and its people, the energy crisis, rising inflation, the state of labour markets and supply chains, and the ongoing impact of China’s approach to managing the pandemic.
Looking ahead, the most recent eurosystem staff projections, published in December, show a decline in the outlook for the euro area, with more persistent inflation and weaker growth.
Inflation was 9.2 per cent in December 2022, down from 10.1 per cent in November, mainly due to falling energy costs. The outlook is for a decline to 6.3 per cent in 2023 and 3.4 per cent in 2024 reflecting moderating energy inflation and the impact of the ECB’s monetary policy decisions.
Despite the recent easing of inflation, it remains too high. High and volatile inflation entails large costs for the economy and society as a whole. The sharp increase in the cost of living over the past year has resulted in an erosion of living standards. High inflation can also lead to lower investment, harming future growth and economic potential. And the impact of inflation has not been felt uniformly across the population with the groups most impacted being those that spend more of their income on energy and food, such as lower-income households. A return to price stability – that is, a rate of inflation in line with our 2 per cent target over the medium term – is necessary for a stable economic environment to support long-term growth.
As interest rates are the primary tool to fight inflation, my colleagues on the ECB’s Governing Council and I started raising our key policy rates in July last year. These are now at 2 per cent. Our primary mandate is price stability and we are determined to achieve our inflation target by aligning aggregate demand more closely with aggregate supply conditions in the euro area economy as a whole. Raising the policy rate also signals our commitment to price stability. It sends a clear message that we will not allow inflation to stay above 2 per cent and helps to contain inflation expectations, guarding against the emergence of self-reinforcing inflation dynamics and tackling the risk of a persistent increase in inflation expectations.
We need to continue to increase rates at our meeting next week – by taking a similar step to our December decisions – and also at our March meeting, although our future policy decisions need to continue to be data-dependent given the prevailing uncertainty. To sum up, inflation remains far too high and interest rates will have to rise significantly at a steady pace to reach levels sufficiently restrictive to ensure a timely return of inflation to our 2 per cent medium-term target. Bringing inflation back to target is essential for the wellbeing of our economy and community.”
CBI Regulatory Priorities 2023
Writing to Minister McGrath, Governor Makhlouf highlighted the Bank’s focus on regulating for an evolving financial system, saying: “Ireland is a global financial centre with the third largest funds sector in the world, the fifth largest insurance market in the EU and has seen significant growth in credit institutions’ aggregate balance sheets. We are also seeing growth in the payments and electronic money sectors.
Growth in these sectors is complemented by rapid change through digitalisation and technological innovation, which is supporting the entry of new players and new business models. These changes bring both opportunities and risks, and will require us to adapt our regulatory approach.
We will be focused on ensuring that the financial system and firms operate to support the interests of consumers and users, and on ensuring that the system remains robust and stable. We do not operate a no-failures regime; it is quite normal and expected that some firms will fail and our focus will be on ensuring that this happens in an orderly way.
In order to support positive outcomes, and the community’s financial wellbeing, our regulation will continue to be outcomes-focused and follow six principles: forward looking, connected, proportionate, predictable, transparent and agile. Our 2023 supervisory priorities include the assessment include the assessment and management of risks to financial and operational resilience, continuing to drive for fair outcomes for consumers and investors, overseeing the withdrawal of Ulster Bank and KBC from the Irish market and detecting and sanctioning market abuse.”