Monetary policy, regulation and inequality - Governor Makhlouf at Social Justice Ireland

• Current high inflation rates are hurting everyone, with a disproportionate impact on the most disadvantaged;
• Monetary policy is responding to return inflation to its 2% target;
• Fiscal policy has a role to play in mitigating the impact of high inflation through temporary, tailored and targeted supports;
• Credibility and trust are essential ingredients for effective policy making.

Governor of the Central Bank of Ireland Gabriel Makhlouf today attended “Towards Wellbeing For All” - Social Justice Ireland's Annual Social Policy Conference.

Speaking at the event, Governor Makhlouf explained why successful economies need stable and sustainable macroeconomic frameworks and sound monetary policy that delivers predictable prices. “In the current high inflation environment, the priority for monetary policy has to be sustainably achieving its price stability target of 2% inflation over the medium term.  Price stability is a pre-condition for economic growth, thus ensuring we have the resources we need to address the structural factors that drive inequality in society. This means investing in education, health, housing, as well as providing access to essential public services at reasonable cost, thereby supporting the welfare of the people as whole.”

He continued by saying that “we know, from both our own research and others that the current high inflation levels are hurting firms and households, with a disproportionate impact on the most disadvantaged. Inflation is often rightly portrayed as a regressive tax. As I said in my (PDF 4.71MB)pre-budget letter (PDF 4.71MB), with limited budget resources, and with a view to not adding further to inflation pressures, fiscal policy should prioritise tailored, targeted and temporary supports for these most vulnerable groups.”

Explaining that the primary goal of monetary policy is to maintain price stability, he outlined that “even though inequality remains outside central banks’ price stability mandates, there is growing recognition that the distribution of income and wealth are relevant to the pass-through of monetary policy”. While maintaining price stability is our primary objective, we are also conscious of other interactions and side-effects of our policy actions, and take them into account when formulating policy. The distribution of income and wealth is something that central banks need to pay close attention to, not least because it has policy consequences as well as implications for social capital and the public’s trust.   Central banks need trust to succeed.   And trust is stronger where social capital is strong.”

He went on to explain why credibility and trust are essential elements for monetary policy to be effective. “The ECB will deliver on its mandate of price stability.  Our credibility is demonstrated by our monetary policy actions that are consistent with reaching our inflation target, and by communication that reiterates our objective and how we intend to achieve it.” He further explained that “a lack of trust weakens the central bank and makes it vulnerable to political pressure. So central banks, like all institutions, need to build social capital.”

“Social capital derives from the connections, attitudes and norms that contribute to wellbeing by promoting coordination and collaboration between people and groups in society. I take these issues of trust and credibility extremely seriously and that is why I am glad to be here today – as a public servant and central banker, it is my job to be open, to be transparent and to communicate what we are doing and why.”

In his remarks he gave an overview of research from the Central Bank outlining trends in inequality noting that “within countries, the main factors driving increases in inequality in advanced economies include globalisation, technological progress and taxation”.

Outlining trends in inequality in Ireland Governor Makhlouf “for incomes at least, Ireland is an exception as income inequality has not increased but has actually fallen slightly since the 1980s, although the top 10% of earners still earned almost a quarter of total income in 2019”. He went on to explain that “Irish household net wealth has increased significantly in recent years, with net wealth inequality also declining” noting between 2013 and 2022 the collective net wealth of Irish households’ grew by €544 billion.