THE GOVERNOR OF the Central Bank of Ireland has said the sharp increase in the cost of living over the past year has resulted in an “erosion of living standards”. 

Gabriel Makhlouf was speaking before the Oireachtas Committee on Finance, Public Expenditure and Reform this afternoon. 

He noted that factors dominating economic activity last year included the war in Ukraine, the energy crisis, rising inflation, the state of the labour markets and supply chains, and the ongoing impact of China’s appraoch to managing the pandemic. 

Domestic headline inflation remained high at 8.2% in December.

However, Makhlouf said that the Central Bank’s expecation remains that inflation peaked during the last quarter of 2022 and “will moderate as the year progresses, assuming no further shocks, supporting consumer spending and overall economic activity as the year progresses”. 

He said the Central Bank expects that 2023 will be a “mirror” of 2022, “with our economy continuing to adjust to the energy shock but a strong labour market and moderating inflation driving a recovery in household real incomes, reversing the trend later in the year and into 2024″. 

Inflation

Despite the recent easing of inflation, Makhlouf noted that “it remains too high”. 

“High and volatile inflation entails large costs for the economy and society as a whole,” he said. 

“The sharp increase in the cost of living over the past year has resulted in an erosion of living standards. High inflation can also lead to lower investment, harming future growth and economic potential,” the Governor said. 

“And the impact of inflation has not been felt uniformly across the population with the groups most impacted being those that spend more of their income on energy and food, such as lower-income households.”

Makhlouf warned that a return to price stability – a rate of inflation in line with the Central Bank’s 2% target over the medium-term – is “necessary for a stable economic environment to support long-term growth”. 

He noted that himself and his colleagues at the ECB’s Governing Council began raising policy rates in July last year and they are now at 2%. 

“We need to continue to increase rates at our meeting next week – by taking a similar step to our December decision – and also at our March meeting, although our future policy decisions need to continue to be data-dependant given the prevailing uncertainty,” Makhlouf said. 

“Interest rates will have to rise significantly at a steady pace to reach levels sufficiently restrictive to ensure a timely return of inflation to our 2% medium-term target. Bringing inflation back to target is essential for the wellbeing of our economy and community,” he said.