Oireachtas Joint and Select Committees

Wednesday, 24 November 2021

Committee on Budgetary Oversight

Inflation: Discussion (resumed)

Mr. Gabriel Makhlouf:

Monetary policy is done at the ECB. We are part of a single currency union. Our preferred tool is interest rates. We can raise our interest rates if inflation is persisting, and we can lower our interest rates if the opposite is happening. As Deputy Doherty said earlier, inflation in the euro area has been below target since the financial crisis, and unusually for a central bank we have been trying to increase inflation for the past decade. Somewhat paradoxically, the current state of inflation is moving things in the direction we want to go, even though the rates are actually higher than we would like them to be. Using interest rates has been a problem for us over the past decade because, for a variety of reasons, inflation was so low that interest rates have been operating at what we would call the effective lower bound. At the ECB they are in negative territory. When interest rates are at those low levels they are not very powerful so we had to develop a different set of tools to use.

I will outline some of the tools we use. We purchase assets such as bonds, which is known in some parts of the world as quantitative easing, QE. We have asset purchase programmes, and we also have interest rates as part of our toolkit. At the start of the pandemic we increased our asset purchase programme by putting in place an emergency programme, PEP, to cope with the crisis. They are our first two tools. The third tool is forward guidance. We guide the market and help to manage inflation expectations through giving forward guidance to markets, which then feeds through to the economy. Finally, we have dedicated loan arrangements where we make available to banks, at preferential rates, money that they can then lend on in the economy to promote growth. That suite of tools is available to us. Our preferred tool is interest rates, but currently and in recent years it has been more difficult to use. If inflation persists and is no longer temporary, we would be looking at the whole of that toolkit. The likelihood is that we would probably reduce our asset purchases before we increase interest rates.