Central Bank of Ireland governor Gabriel Makhlouf has described the general tone of discussions at the International Monetary Fund’s (IMF) annual gathering of economists, central bankers and government officials last week as “gloomy”.
In a blog, posted on the Central Bank’s website on Monday, he said the consensus in discussions “was that central banks should take the necessary action to restore price stability while fiscal policy should protect the most vulnerable through targeted and temporary near-term support — and avoiding fuelling inflation”.
The comments come as speculation mounts that the European Central Bank (ECB), which has raised its main interest rates by 1.25 percentage points since July, will hike official borrowing costs across the euro zone by a further 0.75 of a point when it meets next week.
Euro zone inflation reached a record high of 10 per cent in September, five times the ECB’s target of about 2 per cent, amid signs that price increases are broadening out from volatile food and energy prices into nearly all segments of the economy.
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“The challenge of tightening monetary policy against the backdrop of numerous global uncertainties was evident to see during the annual meetings,” Mr Makhlouf said. “Nevertheless, central banks are committed to restoring price stability and to take the necessary monetary policy action to deliver that. All of us will need to keep a steady hand as we face into choppy economic conditions in the short and medium term.”
The IMF last week lowered its projections for global gross domestic product growth next year to 2.7 per cent, with euro area expansion projected to be only 0.5 per cent.
Earlier this month, the Central Bank cut its 2023 forecast for modified domestic demand — a key gauge of the local economy — by almost half to 2.3 per cent as it raised its inflation outlook given financial markets are now pricing in an extended period of high gas prices.
“Much of the slowdown in growth in the second half of this year — and early next year — is contingent on energy prices stabilising, alongside a smooth transition to more sustainable energy supply. But a more intense and protracted war in Ukraine or a further deterioration in energy or food supplies would result in lower growth and higher inflation than set out in our baseline forecast,” Mr Makhlouf said.
“The costs of this negative external shock to the economy are ultimately ones that have to be met out of collective resources domestically and will require an unavoidable adjustment for households, businesses and the economy as a whole.”
