March ‘probably too early’ to expect interest rates to fall – Makhlouf
The Governor of the Central Bank has said his view is that March is probably too early a time to expect interest rates in the eurozone to start falling again.
Gabriel Makhlouf also said he would like to see a much faster pass through of European Central Bank interest rate changes to the real economy.
Mr Makhlouf told TDs and Senators at the Oireachtas Committee on Finance, Public Expenditure, Reform and Taoiseach that people should certainly not be doing financial planning on the basis that March would mark the start of a drop in rates.
“The honest answer is its too early to tell,” he remarked.
The Governor said he thinks we are getting close to the “top of the ladder” of interest rate increases and “we are there or there abouts.”
But he added that the ECB did say that it was going to hold rates there for a while when it reaches the top.
“I think people who are saying that in March we are going to reduce them are just speculating and my personal view…is that I wouldn’t speculate,” he said.
Sinn Féin’s finance spokesman, Pearse Doherty, said there are people who are wondering what they should do with their tracker mortgage rate.
Mr Makhlouf said he was not saying that at the next ECB Governing Council meeting it is going to hold rates steady.
“We’re near the top,” he said. “I don’t give financial advice…so people should not take what I say as something to plan for their trackers or whatever.”
He added that he thinks that when the next set of projections is produced by the ECB in December that is likely to be a moment when there will be a better sense as to what the situation will be next year.
Asked by Fianna Fáil’s Jim O’Callaghan what power the Central Bank has to force banks to pass through interest rate changes to deposit customers, Mr Makhlouf said it doesn’t have any powers around setting of rates.
The Governor said these are commercial decisions for banks.
He said while the banks have been slow in passing on rate increases, it is not the case that they have done nothing.
“From a monetary policy perspective, I would want much faster pass through of the decisions we make through to the real economy, on both sides of the ledger I should say,” he said.
He said how the monetary policy decisions are being passed through to the economy is something that he and the Central Bank wants to pay extremely close attention to.
“So this is not an issue that is going to disappear from our work programme,” he stated.
Pearse Doherty also questioned why the Central Bank didn’t seem to have a plan, like the Financial Conduct Authority in the UK did, to work with banks to ensure rate changes were passed on.
Deputy Governors Vasileios Madouros said the bank is extremely focused on monetary policy transmission.
“It is true that on the deposit side the Irish banking system has been slower, both relative to what we are seeing… in other parts of the euro area and also what we would have expected relative to our own history,” he said.
Mr Doherty said consumers are seeing mortgage rates that are higher than in the rest of Europe, deposit rates that are lower and the banks are making bonanza profits.
“People feel screwed by the banks,” he said.
Asked by the Aontú leader, Peadar Toibin, about whether, given the profits being made by the banks, that the bank levy should be increased, Mr Makhlouf said his advice to anyone thinking about a tax policy change is to consider what are you trying to achieve, where do you want the tax to fall and the indirect consequences of any decision you make.
Regarding the question of whether the Government should introduce some form of mortgage interest relief, the Governor said it would depend on how it was designed, how large it was and whether it was done through the tax or the welfare system.
He added that the ECB Governing Council had emphasised in recent years that supports from Government should be targeted, tailored and temporary and he said he agrees with that.
In his opening statement to the committee, Governor Makhlouf added his voice to warnings about the Government’s spending plans in the upcoming Budget.
He said the Summer Economic Statement “signalled a budgetary package that is significantly more expansionary than was outlined previously.”
“Such revisions can amplify demand in an economy already operating at capacity and shift the stance of fiscal policy in a pro-cyclical direction,” he added.
“It is important that fiscal policy doesn’t add to our own domestic inflation problem” and that “would damage the competitiveness of the Irish economy and potentially undermine its ability to deliver sustainable growth in living standards.”
Yesterday, the Central Bank’s Quarterly Bulletin outlined the same arguments.
The Governor welcomed the Minister for Finance’s decision to establish a savings fund to put aside some windfall corporate tax receipts.
On the pass-through of recent increases in interest rates by the European Central Bank, the Governor said consumers should be prepared to see increases in both lending and deposit rates over the coming months.
On mortgage arrears, the Governor said the latest figures showed that some people in early arrears are moving into arrears of between 90 days and one year.
He described the numbers as “very small at present” but said the Bank remained vigilant as arrears can be a ‘lagging indicator’ which may take more time to become apparent.