Central Bank governor Gabriel Makhlouf said on Wednesday he was “worried today” about the impact rising prices are having on Irish households, but patience was the “right response” to inflationary pressures as the economy emerges from the pandemic crisis.
“I am very, very conscious that inflation today is impacting on households across the country,” Mr Makhlouf said.
However, the governor told an Oireachtas committee that it was “not so much a question of time” before policymakers take action such as increasing interest rates, but more a case of being vigilant in case temporary supply “blockages” – which cause inflation and have in turn been caused by surges in consumer demand – show no signs of being repaired.
“Because of the pandemic, a lot of the supply chains closed down and have had to reopen and have taken time to reopen. Famously, a lot of the ships that transport goods from Asia to the US or Asia to Europe are all in the wrong place,” he said, speaking at a hearing of the Oireachtas select committee on budgetary oversight.
“In some respects it doesn’t matter if it’s four months or if it’s a year, if they’re getting repaired, we know that they are going to subside.”
While the semiconductor shortages affecting car manufacturers and the production of white goods are likely to continue in 2022, policymakers know it is likely only a matter of time before semiconductor supplies come on stream, he noted.
“It’s not so much a question of how long will this go on before I start to worry. It’s more that if I see evidence that the blockages are not being fixed, or that different things aren’t happening, then I will start to worry. But I am worried today,” Mr Makhlouf said.
Consumer price inflation reached 5.1 per cent in Ireland in October, its highest rate since 2007, and stood at 4.1 per cent year on year in the euro zone, with rising global energy prices the major driver in recent months.
Mr Makhlouf sits on the European Central Bank’s governing council, which sets monetary policy for the euro area. It is of the view that inflation should “recede gradually” in 2022. The likelihood is that the ECB governing council would also seek to reduce its asset purchases before increasing rates.
The governor reiterated his earlier comments that policymakers should not be complacent about inflation risks and “should respond without delay” if evidence emerges of more permanent structural economic changes or a wage-price spiral. But he also stressed a need for patience.
“Fundamentally, increasing interest rates today would be a mistake. On the evidence that we have today – and I emphasise and underline the word today – [on] the factors that are driving inflation, the answer to them is not to raise interest rates,” he said, citing the risk this would pose to economic recovery.
Mark Cassidy, the Central Bank’s director of economics and statistics, said the Central Bank would be concerned about a wage-price spiral only if wages were rising faster than productivity.
“We’re not seeing that at the moment. What we’re seeing is that wage increases are quite strong in those sectors that are performing best, in those sectors that are most productive and in those sectors that are able to afford it.”