In a world of central bank hawks and doves, Gabriel Makhlouf says he is neither but rather an owl when it comes to policymaking, echoing an answer once given by his European Central Bank boss Christine Lagarde. “I just look at the evidence and try and decide what it is telling me,” Ireland’s Central Bank governor says.
Policymakers like Makhlouf have spent the last 12 months fielding questions about interest rates, a sort of cat-and-mouse game that fills column inches and drives speculation but most of the time generates more heat than light.
As we sit chatting in his plush top-floor office at the Central Bank’s headquarters on Dublin’s North Wall quay, the city’s shimmering skyline in the background, three swans wing their way down the Liffey. I wonder what sort of policymaker swans signify. They’re white like doves but also known to be aggressive.
Inflation is proving far stickier than central banks would like and some analysts believe the price of getting it down to 2 per cent – the ECB’s target rate – will be a full-blown recession in the euro zone. (The Irish economy is already in a technical recession on the back of two consecutive quarters of negative growth.)
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Makhlouf thinks this thesis is too pessimistic and contrary to the ECB’s baseline projections.
“What I see at the moment, certainly in Ireland, is an economy at full employment, an economy with the highest level of jobs for a long time, an economy on the brink of capacity. These aren’t the signs of an economy going into recession,” he says.
He believes the recent slide in market sentiment may relate to the Bank of England’s bigger-than-expected half-point rate hike last week. With inflation in the UK stuck at close to 9 per cent, the UK’s central bank has opted to push harder on the interest rate pedal.
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Makhlouf believes labour market pressures in the UK are stronger than here or in the euro zone for several reasons, including the retreat of older workers from the workforce during Covid and a decline in migrant workers from Europe since Brexit, which may be feeding through into stronger wage-based price increases.
But that doesn’t mean Europe will not follow suit when it comes to further interest rate rises in the months ahead. ECB policymakers, including Makhlouf, have all but signed off on another quarter-point increase next month, which will be the ninth in 12 months – the most aggressive ramping-up of interest rates undertaken by the ECB to date – and another click in the financial temperature dial.
The debate now is whether the current price dynamic warrants an additional increase in September and possibly another one after that.
“We’ve seen a greater persistence in inflation – it’s stickier,” he says. “We’re making these decisions meeting by meeting and looking at the data and the evidence and what’s happening to inflation dynamics. My view is that we’re near the top of the ladder,” he says.
“If you go up a ladder, it’s quite easy to take two, three rungs at a time when you start but as you get closer to the top, judging when to stop isn’t as straightforward.”
Despite the speculation, Makhlouf insists the end point for interest rates in the current cycle – also known as the terminal rate – is not something that keeps him up at night and that he probably won’t know when it is reached until after the fact.
Makhlouf is half way through his seven-year stint as Central Bank governor. When appointed in 2019, he was the first overseas official to fill the post in the organisation’s 76-year history.
Born in Cairo in 1960 to a Cypriot-British father and Greek-Armenian mother, Makhlouf spent his early years living in various countries as his father pursued a career as a United Nations official. He has a degree in economics from the University of Exeter and a master’s in industrial relations from the University of Bath.
For a time in the early 2000s, he was the principal private secretary to then UK chancellor of the exchequer Gordon Brown. He joined the New Zealand treasury in 2010 and was appointed chief executive and secretary in 2011.
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His period at the helm here has been anything but routine, coinciding with a pandemic, an unprecedented surge in inflation and more recently Russia’s war in Ukraine, all of which have prompted a sea change in monetary policy, from ultra-soft to ultra-hard seemingly in the blink of an eye.
Turning to the upcoming budget, the big issue is whether it might be framed with the next general election in mind. Taoiseach Leo Varadkar is already trumpeting the idea of a €1,000 tax break for middle-income earners.
In a recent pre-budget letter to Minister for Finance Michael McGrath, Makhlouf warned there were now “binding capacity constraints” in the Irish economy and labour market and that it would be “counterproductive” for domestic fiscal policy to stimulate demand.
The last time the Irish economy was operating at full capacity and full employment was back in 2006 and 2007, he says. “At the time we thought everything was great and then it turned out it wasn’t. We have fixed the problem of reckless lending but the fact is when you’re operating at capacity, it’s pretty obvious what happens when you add to aggregate demand,” he says.
“You’ve got the experience of history to tell you that. It’s also just basic economics.” The fact that the Central Bank’s offices were built on a site earmarked for the now defunct Anglo Irish Bank, the lender that supposedly bankrupted the nation, is a history lesson in itself.
“If the Government adds to aggregate demand (by spending too much or offering generous tax cuts), it’s going to fuel inflation and because monetary policy operates at a euro-area level, it is not going to be able to do as much as it should to stop inflation in Ireland,” Makhlouf says.
“The biggest risk we would carry is where the euro area is managing to bring down inflation but in Ireland it’s going up because that then affects our relative competitiveness,” he says.
Additional spending or tax reductions in the budget should stay within the bounds of the Government’s 5 per cent spending rule (the rule limits the annual increase in net Government spending to 5 per cent), the governor says. Adhering to the rule, however, gives the Government little financial room for manoeuvre and all but forbids the sort of tax cuts Varadkar is pushing for.
He acknowledges that’s a difficult sell politically, particularly when the exchequer is awash with tax receipts from the business sector.
“Specific tax proposals – and the balance between tax and spending – are ultimately political decisions. As a general rule, I have a preference for broad-based tax systems that contain few reliefs and exemptions so as to minimise distortions,” he says.
The easiest way to broaden the tax base is to get rid of reliefs, he says. “One of the things that’s probably run its course is the lower VAT on hospitality which was a temporary measure.”
Makhlouf and the Central Bank have come in for criticism for supposedly failing to protect borrowers whose loans have been sold on to non-banks. Critics say up to 60,000 borrowers here have become effective “mortgage prisoners” of so-called vulture funds, unable to switch providers and forced to pay sometimes penal interest rates as a result.
Consumer advocacy groups have called for a cap on the interest rates charged by these funds. Makhlouf believes capping interest rates would be distortionary and might affect potential competition. He also sees potential for more borrowers to switch. Critics, however, say the borrowers are trapped and can’t switch and that being railroaded off their original terms with the original lender is potentially in contravention of the consumer protection code, which obligates providers to treat borrowers fairly.
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“If you interfere in the market with an interest cap power, I think there are more downsides than upsides,” he says. Capping rents in the property market here has had unintended consequences [in terms of pushing landlords out of the market], he says. The argument is unlikely to stop there.
Makhlouf admits to not being too familiar with Ireland culturally speaking before taking up his current role. “I’m a big rugby fan so I’ve been watching the Irish rugby team since the days of my teens.” He claims, diplomatically, that it’s a win-win situation now when Ireland play the All-Blacks.
He describes Ireland as “an incredibly dynamic place” and claims to be “very comfortable” living here. He likes to compare Ireland with New Zealand.
“The populations [in terms of size] are similar, the psychological power of agricultural is similar,” he says. “The narrative is almost that agriculture is the basis of the whole economy but actually it isn’t in either country.”
One big difference that he cites and a big factor economically between the two countries is the proximity to markets. “Everything from New Zealand is far away. Going to Australia is like crossing Europe,” he says. “In Ireland, our markets are here: that’s a massive advantage.”
The lack of focus on Asia is an issue that strikes him not just about Ireland, but Europe. “Economic growth in the 21st century is largely being driven out of Asia,” he says. “I’m not just talking about China which has huge growth potential still, I’m talking about the whole of Asia… The population of the Philippines is 100 million people, Vietnam is 80 million people, Thailand the same – these are places that have grown dramatically in the last 20 years.
“In New Zealand and Australia, they’re obsessed about these places and, from my perspective, understandly obsessed,” he says.
Perhaps that was in the mind of the Central Bank authorities when they appointed an Antipodean regulator.
CV
Name: Gabriel Makhlouf
Age: 63
Position: Governor, Central Bank of Ireland
Lives: Dublin
Family: Married
Something you might expect: A rugby fan and he likes travelling
Something that might surprise: I’m an Elton John fan, largely as a result of my wife’s influence.
