ECB is considering letting inflation drift above the 2pc target rate
THE governor of the Central Bank of Ireland (CBI) has said the European Central Bank (ECB) is debating whether to pump up inflation in the eurozone.
Gabriel Makhlouf, who sits on the ECB Governing Council, told a University of Limerick webinar yesterday that the ECB is considering “matching” the Federal Reserve policy of overshooting its inflation target of 2pc.
The governor said the ECB was undertaking its first major review of inflation strategy since 2003. One of the options being examined is allowing inflation to rise above 2pc long enough to bring average inflation close to the target.
He said the ECB was unlikely to “intentionally” overshoot as a policy, however.
Central banks target stable, relatively low inflation to promote sustainable growth and economic predictability.
However, persistently low inflation has kept interest rates pinned at zero, which some commentators believe limits the ability of monetary policy to fight recessions.
In a wide-ranging address to the Kemmy Business School, Mr Makhlouf also said the CBI was remaining cautious about financial stability, both at the systemic level and for individual institutions. That meant strict borrowing limits and capital requirements would remain in place for Irish banks, despite the savings glut that has arisen as a result of dampened consumer spending.
“We’re being quite cautious about the huge increase in savings,” he said. “Our focus is on making the system stable in the long term. I don’t think a temporary increase in savings is going to cause us to review our regulatory capital levels.”
However, the governor indicated the CBI is changing its approach to mortgage arrears, especially in terms of resolving long-term problem debts. He said regulators would be assessing the effectiveness of measures already in place using new data and analysis.
“A key priority for us is that lenders continue to engage effectively with distressed borrowers to deliver sustainable solutions,” he said. “This applies to borrowers that are in distress as a result of the pandemic but also to the legacy cases which remain a problem in the Irish banking system. It is in the interests of the individuals involved, their lenders and also the community as a whole that these legacy issues are resolved.”
He said the CBI would host a new senior-level, cross-sectoral industry stakeholder forum, bringing together key financial sector industry stakeholders to engage on distressed debt and other topics.
‘Focus on making the system stable in the long term’