Transcript of Governor Gabriel Makhlouf's interview with Martin Arnold, Financial Times

06 March 2020 Interview

Gabriel Makhlouf

Martin Arnold: Let's start with the recent election. I’m not expecting you to comment on Irish politics, per se, but there have been some fairly ambitious proposals, particularly from Sinn Féin in terms of spending increases. How much capacity do you think there is for a fiscal stimulus in Ireland of one sort or another? What are the fiscal constraints on any future government, presuming one is formed?

Gabriel Makhlouf: I’m going to be a bit cautious about what I say because, as you indicated, at the moment where we are is we’ve got a set of political parties made a bunch of promises and they’ve got to turn these into a programme for government and we’ll see what comes out of the programme for government. But, in terms of how much fiscal space there is, I suppose part of the answer is depends how you design your programme for government. We, the central bank, has said last year before I arrived in the role and it was sort of flagged since that actually reducing debt should remain an important objective.

Martin Arnold: That means running a budget surplus?

Gabriel Makhlouf: Well, I think, without commenting on what size that surplus should be, by definition, to reduce your debt you need to, you know....But, at the moment we tend to use that as the metric and, of course, if there is a constraint that’s worth flagging, you’ve got the Stability and Growth Pact, you’ve got the framework with which the euro system, the European system operates, so that’s a starting point.

So, from what I’m telling you is over a year ago, or at least last year, the central bank made it clear that there should be a reduction and, by definition, that means that there isn’t a huge amount of space.

But, actually, I don’t think fiscal is necessarily just the issue here. It’s an interesting conjecture that we’re at right now in Ireland. The speech I gave at the FT’s event two weeks ago was also the day that we published our quarterly reporting, the first one for the year and we’re forecasting, in European terms, pretty respectable growth rates.

We think that growth last year was 5 per cent. We’re waiting for the final data on that but the economy is operating more or less at full capacity. The interesting conjecture is this, which is even if you didn’t have any fiscal constraint, how much more expansion can you have in an economy that’s actually operating at the levels that it is?

Why I’m calling it an interesting conjecture is because I mentioned this in the speech, we’ve also got looming ahead of us – when I say ahead of us, I suppose it’s started – the whole future of the relationship between the EU and the UK about to be negotiated and that, for Ireland, is particularly important because of our long interconnectedness with the UK economy.

I signalled in that speech that we should all be planning; whether consumers, businesses or regulators, we should be planning for divergence, we should be planning for hurdles, we should be planning for friction and we should use the transition to plan.

But, at the end of this period, we could be faced with a situation which is damaging for Ireland. We didn’t in the forecast that we’ve just done but we did last year when we were still debating the withdrawal agreement, publish two forecasts, one on steady as she goes, the other one on no-deal and no-deal was going to have a significant impact.

So, I’m calling this an interesting conjecture because in a bad scenario, notwithstanding our current forecasts, you could certainly find that the fiscal surpluses that the current government has forecast are suddenly challenged very much by that change in sentiment and activity.

And, that’s before you get to the risks that we have also been signalling, which are a little bit more medium-term, which is what will reform to the international taxation system, never mind the international trading system, do to Ireland? So, the economy is healthy.

Martin Arnold: But, there are risks.

Gabriel Makhlouf: But, there are risks and to what extent should you be taking… I think you should be careful about the risks but also how much more can the economy actually do when it is operating at the levels it is.

Martin Arnold: On the fiscal debate in Ireland, it seems that housing was one of the dominant issues in the election campaign and some of the proposals that are being made are to try and address the public’s concerns about housing. So, they wouldn’t necessarily be designed as an economic stimulus, they would be more designed to address social issues in Ireland, I guess, is the point.

Gabriel Makhlouf: That certainly was one of the very big debating issues during the election campaign and, absolutely, the supply of housing needs to be addressed and whether you can do that overnight is extremely unlikely, so it’s going to take a while and it’s not simply construction in my view. It tends to be a bigger issue, in my experience.

When you look at international experience, what you see in a number of attractive cities in particular, big cities – Sydney, Vancouver – around the world is there’s huge demand and the supply response depends on the ability of the planning system to adjust, the ability of supporting infrastructure to be put in place quickly, the availability of labour to actually do the building, do the carpentry, do the plumbing, all of that sort of stuff.

So, when you’re running, as Ireland is at the moment, an economy pretty close, as I said, to full capacity, you’ve got to meet all of those challenges, in my view, to deliver the housing supply that you may want and need.

So, I think it is more than a fiscal question. I think the fiscal issue is there and obviously the thing about fiscal is it is ultimately with government to make choices. Even if there is ceiling – and just for the sake of argument, there is an absolute ceiling – governments can reprioritise.

Obviously, they’ve got to make choices, etc, but I think one of the interesting challenges right now is just the capacity of the economy to be able to make that sort of change and then to think about the risks that may be ahead of us.

Martin Arnold: Going back to Brexit and you’ve talked about the significance of the risk for Ireland if there is no deal. Which sectors, in particular, do you think are at risk?

Gabriel Makhlouf: The main sectors at risk are food… food and agriculture, basically, is the main one because of the degree of our exports. We published a paper on this last year, but that’s the main…

Martin Arnold: Because of the exports to the UK?

Gabriel Makhlouf: Yes, and the imports, as well; so, that’s the main issue. There’s also the fact that we use the UK as a transhipment route, so if you get extra frictions and hurdles, that will have an impact. 

Because we were saying if there was no deal, what would happen. Over the medium-term you’d expect to see recovery but you’re into the world of uncertainty here depending on exactly what the UK and EU decide to… you know, what they settle on. But, we know at a minimum it’s going to be different to where we are right now.

One of the more manageable risks that we have, if I can put it like this, is we’re now in this world of uncertainty. Sorry, this is before coronavirus. We’re now in this world of uncertainty and Michel Barnier and David Frost and everybody, the media are going to be full of stuff about disagreements and all the rest of it; traditional stuff in trade negotiations, I suppose.

And, we’ve got this odd transition period and there’s a danger that everyone is going to sit around saying, well, hopefully, it’s all going to be fine but we should use the transition period to start planning, use it to build certainty.

Martin Arnold: Do you feel the danger of complacency among businesses?

Gabriel Makhlouf: Well, I think there’s two things. One, partly because I’ve heard it directly, there is a danger of some complacency and the other one is that people remain uncertain and start to postpone their decision-making and their investment and their planning. And, what I’m saying is, actually, I can’t tell you what’s going to happen at the end of this but I’m very confident there will be more friction, more hurdles, more divergence than there is today, therefore start planning for that.

And, if you’re a business you should be asking yourself the question, actually, can I manage divergence, frictions and hurdles? For some businesses, they already may trade with lots of different countries and they’re used to divergence – I’m just speculating here – so they may not think it’s a big deal, but others who rely hugely either on suppliers in the UK and the UK is part of their supply chain or their final market is in the UK, they should be asking themselves well, actually, what will I do? Should I now be looking for a different supplier? Should I be trying to insert myself in a different supply chain or include an EU country in the supply chain instead?

They should be making these calculations, use this transition period productively, if I can put it like that, and manage their own risks and, in some respects, deal with the uncertainty.

And, financial services firms, some of them, have already done some of that because some of them have decided to move to Dublin or to set up Dublin operations or to move to Amsterdam or whatever, from London. So, we’ve seen some responses but this is a wider real economy thing, it’s not just financial services.

Martin Arnold: Yes. Financial services were ahead of the curve, really, weren’t they?

Gabriel Makhlouf: Arguably, yes.

Martin Arnold: Okay. Clearly, the big issue of the day and of the moment is the coronavirus and the issue that many economists and central bankers are grappling with at the moment is how bad is this going to be and what’s the impact going to be. What’s the latest that you can tell us on the thinking from central banking in Europe on this and the outlook, not just for Ireland but for the eurozone, as whole, because people are getting increasingly concerned about it as seen by the market reaction this week.

Gabriel Makhlouf: Well, two weeks ago I said in that speech that this was a big risk to our forecasts, that it was going to have an impact on Ireland, anyway, through two channels, direct or indirect.

Our exports in China could be hit. In 2018 it was 19% of world GDP, probably slightly bigger. When you’ve got a big chunk of the global economy sort of closing down, that’s going to have an impact on the world; it just is. So, there’ll be an indirect impact on Ireland and that statement which was focused on Ireland applies absolutely to the EU and the eurozone.

What I also said two weeks ago was I thought it was too early to tell and I still think, actually, that it’s too early to tell exactly what the economic impact will be. The main focus right now is the health impact and that has to be the main focus.

What will be the economic impact? Well, I haven’t seen recent data points for me to be able to give you a more definitive picture. The absolute certainty is it’s not zero impact and as I also said to somebody the other day, when we had SARS in 2003 China was a much smaller player in the world economy.

Martin Arnold: Yes, of course.

Gabriel Makhlouf: It’s a big player.

Martin Arnold: It’s gone from 4% of global GDP to 19%.

Gabriel Makhlouf: Yes. So, it will have a global impact. Now, what’s the size of the impact? I think it’s too early to tell and, therefore, what should the response be by central banks and governments? I think it’s too early to tell.

The focus has to be on stopping the spread and dealing with the actual problem. That is the immediate urgency, which is to just contain it but two weeks ago, when I spoke last time, it was a sort of Chinese problem. It had some international ramifications but now it’s…

The WHO has not called it a pandemic. I’m not sure what the technical definition of a pandemic is but it’s obviously a big issue in Europe and especially in Italy. The United States has come out. So, the health authorities need to get on top of this, that’s the main priority.

Martin Arnold: Are you hearing from businesses that they’re starting to be affected yet?

Gabriel Makhlouf:  I haven’t directly heard it from businesses. I’ve read material in the FT and elsewhere about some of the big supply chains being disrupted, in particular. I think Apple is the most high profile one but that’s not surprising. What will that actually do to those firms, well, I don’t know at the moment. It partly depends what their stocks were, etc, and how long this thing lasts.

The faster it is resolved, the less likelihood that disruptions to supply chains will be permanent. The longer it goes on, the greater the possibility that people will start to rethink those sorts of choices, otherwise you’d expect there to be a short-term impact and with the global economy then just recovering and rebounding back, that is what you’d expect.

So, right now, I think the key role for, certainly, the central banking community, is to look very, very closely at the data and the evidence and to hope that a clearer indication of when the spread of the virus is likely to… I read somewhere the other day that we’d reached a tipping point in China but I don’t know if this is true or accurate.

But, the moment we can start and central bankers can start to see that the medical authorities are on top of it and it’s actually going to be managed downwards, we can start to make judgments about how long is this going to last and therefore what sort of response do we need to make, if any.

Martin Arnold: But, until that point, can you not make a response?

Gabriel Makhlouf: Well, I think we can always make a response but, right now, I haven’t seen enough information to lead me to conclude you’ve got to make a response now. It’s only two weeks ago that I was saying it’s too soon to tell. Two weeks later, do I now have a lot more information?

Martin Arnold: Not really.

Gabriel Makhlouf: What I have is evidence of this virus spreading. I’ve definitely got evidence of that, clearly, but do I have enough information to tell me what the economic impact will be and the extent to which there needs to be monetary policy response, for example? I do think it’s probably a bit early.

Martin Arnold: In just over two weeks’ time, the ECB governing council is going to meet.

Gabriel Makhlouf: Indeed.

Martin Arnold: And, there will be, also, new economic forecasts or updated economic forecasts provided, as well as a decision on monetary policy and it’s not clear that by then we’ll have any more hard economic data on which to go on but we may well have a further spread of the virus.

Gabriel Makhlouf: I’d like to think we’ll have some more economic data but let’s assume we don’t. What I’d hope at least we’d have is a sense of whether the medical authorities now understand how quickly the virus can be contained. At least you’d be able to make some sort of calculations then of when this might end, whether the global economic could go back to a virus-free world, and then come to a view on the economic impact. If we’re in exactly the same position, obviously, it then becomes extremely difficult if there’s no evidence but I wouldn’t want to speculate.

Martin Arnold: What can monetary policy do when you’re talking about a virus that’s killing people?

Gabriel Makhlouf: Well, exactly. We need to think about this very carefully in terms of what we can do. At the end of the day, it’s about supporting economic activity but if economic activity is closing down in a particular way then what we may need to do is… Well, I wasn’t around in 2003. I don’t know what sort of conversations people had thinking about SARS but, in the end, I don’t think SARS had the economic impact.

Martin Arnold: No, but it didn’t have the global spread either, did it?

Gabriel Makhlouf: No.

Martin Arnold: Just developing that, people have been talking about what response monetary policy might have should the virus continue and then this debate about is monetary policy already stretched to its limits and are we at the lower bound for interest rates. Is there too much, already, concern about side effects for there to be further easing of monetary policy in the eurozone? What do you think about those questions? What’s your feeling in terms of whether the central banks are running out of ammunition?

Gabriel Makhlouf: Well, we’ve still got ammunition but we are pretty close to… Well, actually, sorry just to take a pause back because your question was very broad about central banks and I was going to start answering about the euro area.

But, if you take a global perspective, clearly some central banks have obviously got more ammunition than others, so that’s a starting point. Again, just sort of sitting on the virus and its impact on the global economy, a global economic monetary policy response is more possible.

Martin Arnold: We’re already seeing some of that in Asia. Asian central banks are responding.

Gabriel Makhlouf: Yes. So, at that level, at global level, there is more of a response. When you get to the euro area, in comparison to elsewhere, we are relatively more constrained but we still have ammunition and we’ve been using that ammunition for the last few years in the euro area.

Going beyond the virus and how can monetary policy respond to the virus, because I think that particular link is more complicated, and just in terms of economic activity, etc, the reality is that in Europe… In other currency areas you tend to get all of those levers of economic policymaking functioning sometimes well, sometimes not perfectly, but they all function to support economic activity in some way.

In the euro area it is more complicated. As Mario Draghi said back in September and, actually, just as he left, monetary policy would be helped if the countries that had some fiscal space actually took some action.

Martin Arnold: And, Christine Lagarde said the same thing.

Gabriel Makhlouf: So, by definition, monetary policy would be helped if other economic levers also played…

Martin Arnold: We’re sitting in one of the countries [Germany] right now.

Gabriel Makhlouf: Well, it’s interesting to see the development of the debate here, which seems to be moving.

Martin Arnold: You get the sense it’s moving? I get the sense it’s focused on other things. You’ve got this kind of inward-looking debate about the future of political leadership.

Gabriel Makhlouf: Oh, sorry, you mean the overall debate in Germany, right now. Clearly, there’s other things that have got a higher profile but what I’d be interested in is the economic debate, whereas not that long ago there were some people saying the German position on fiscal policy is completely fixed and unmovable.

Well, if you just look at the last 12 months, a number of people have said well, maybe, actually we should do something different. Just the fact that that is happening, I think is constructive.

I think there needs to be a debate. From my perspective, and I’m talking as the Irish Central Bank governor looking from the outside in but also looking at a fellow euro country, I think there needs to be a debate, not just in Germany but across the whole euro area; how do all the various levers of macroeconomic policy support each other?

Monetary policy has an important role to play but it can play that role more effectively to stabilise the economy, to support the business cycle appropriately if all the levers are working. And, I think every country needs to have that sort of discussion and debate within their own countries but also, I think, collectively, as the EU.

Martin Arnold: There, are you suggesting more of a centralised fiscal capacity at an EU or eurozone level?

Gabriel Makhlouf: I think so. At a theoretical level there needs to be one. I’d like to see more discussion, debate and work on if you had one, how could it work. Sorry, go on.

Martin Arnold: I was just going to say there’s a lot of opposition still, in Germany, to that idea.

Gabriel Makhlouf: There is and I think we need to understand why that is. What is the opposition to that and why is it? And, what does that therefore mean for the living standards of the citizens of Europe and the citizens of Germany?

Monetary policy, as I said earlier, to work as effectively as we’d all want it to, needs to be part of a framework where all the macro levers are supporting each other. In the current environment, if we had the fiscal capacity that Mario and Christine have talked about, then the ultimate outcomes that some of the citizens of Europe are seeing in monetary policy, maybe right now and which they’re unhappy about, may actually be better.

All of this, for me, it’s part of why we need to do the review because I think the review gives us the opportunity to engage with the wider public in Europe and try and listen to their challenges and experiences and explain to them what we’re trying to do, why we’re trying to do it, why, actually, there’s a limit to what we can do.

There are some things that the ECB can’t fix. There are other things that, actually, we can do. And, I think there’s an obligation on us to put in place a clear narrative of the world that we’re operating in.

Isabel Schnabel, actually, a couple of weeks ago, I think the word narrative was in the title of her speech and I thought she was spot on and I was just pleased that she was telling that story. And, I think we need to do more of that, ultimately to help decision-makers to discuss those challenges, to feel less constrained about the capacity of their decision-making.

Right now, you’re right, there’s lots of reluctance to do certain things. From a central banker’s perspective, the reluctance to do certain things means that other things won’t happen.

Martin Arnold: What do you mean by that?

Gabriel Makhlouf: What I was referring to earlier, which is that if you want monetary policy to have the sort of impacts you’ve been used to in the past, then you do need to have the other levers of macro policy actually play a role. And, if you decide you don’t want a fiscal capacity in Europe, for example, you don’t want a number of other things to happen, that means you’re accepting, to a certain extent, that it will be harder for monetary policy to deliver.

It is delivering. It’s absolutely delivering and it has delivered but it just makes it harder. And, people complaining of low interest rates, as an example, the problem with low interest rates is not just the ECB’s problem. Isabel’s speech basically made that very clear.

Hence, my speech today, amongst other things, I’m really interested in the whole issue of narrative economics which Robert Shiller has been writing about, which I also think is part of the…

Martin Arnold: To do with expectations and forward guidance?

Gabriel Makhlouf: Yes. Expectation setting, forward guidance. One of the questions I pose in the speech today is what are we learning from the behavioural insights, behavioural economics work that people like Richard Taylor has been doing?

I think Shiller has shown us in some of his writing about how particular narratives have a macro impact and I think we should be thinking as central bankers – and the wider EU economic policymaking community, not just central bankers – we should be thinking what’s the narrative we have created.

What are consequences of the narrative we have created? When we communicate as central bankers, what’s the narrative that our messages are landing into? What is it we would like to create as a narrative? There are clearly macro consequences of the narrative and I think we need to pay more attention to that.

Martin Arnold: What do you think the narrative is at the moment that’s being created the central bank communication in the eurozone?

Gabriel Makhlouf: I think there are many narratives. I think that’s part of the problem. There are many narratives. There’s a narrative that’s clearly emerged in Germany, which Isabel was challenging.

I think in Ireland there’s quite a different narrative. There isn’t much of a narrative about the ECB and monetary policy, in particular. In Ireland, they’re asking themselves the question why are our mortgage rates higher than others in Europe?

Now, the reason for that is because of quite Irish-specific contexts; Ireland’s financial crisis, the history of default in Ireland, the nature of collateral in Ireland in comparison to what it is elsewhere. There are different explanations, but that’s the debate in Ireland. In Germany, it’s about interest rates they’re receiving or not receiving.

Martin Arnold: I think Christine Lagarde was asked a question about this at the last press conference, why are Irish mortgage rates higher than elsewhere?

Gabriel Makhlouf: Well, that’s the headline reasons for it. So, there are different narratives in different parts. I’ve got a sense of the German one because you guys report it very well but there’s 19 countries. I’m sure there’s different sort of narratives.

So, my sense is the narratives that I am aware about, I don’t think they’re completely right. I think we need to do a better job to help create what I think is a more accurate narrative. And, the point I make in the speech is that if there is no narrative, if you leave a vacuum, it will get filled and it won’t necessarily get filled with accuracy. So, we need to take responsibility for telling the story as we see it but it’s really important that we tell the story having listened to people and having understood what their stories are. It’s not a one-way street.

Martin Arnold: The general public’s perception of inflation in recent years is something like 9 per cent annually, so it really doesn’t connect with the fear that inflation is too low and we need to get it higher. People feel that house prices are too expensive and rents are going up and energy costs are soaring and it’s hard to make ends meet, anyway, so why are you talking about inflation being too low? This is crazy.

And, then, you get to the inflation target and, well, should we change the inflation target? Is below but close to 2%, is that something that’s clear and understandable to everybody? Probably not. It could be more clear but how do you change it? And, if just changing it actually addresses those problems. They’re big questions.

Gabriel Makhlouf: Yes, they’re very big questions. On the first one, I was in Southwest Ireland last week or the week before – anyway, recently – and I did my own completely non-statistically valid survey. I went to an institute, a technology college, and spoke at a lecture theatre which had a mix of students, some members of the public, academic staff. And, I did so what has inflation been for the last 10-15 years, I said, on average?

And, I had a whole load of responses. Most of them were in the region of 6-7 per cent. One guy got one-point-something and he turned out to be the economics lecturer, so he was cheating. So, my randomly non-statistically valid sample was in line with the Commission’s own and I think it’s a real issue.

Martin Arnold: Well, it’s a real issue also for legitimacy and support.

Gabriel Makhlouf: Credibility, trust and effectiveness are my watchwords for the strategy review. If people’s reality is different to the one that we assert, we’ve got a problem. I actually do think we need, as part of the review, to look at how… and housing costs are, actually, in Ireland, anyway, they’re the main issue for the difference between what people think and what the HICP is telling us, but there could be different things elsewhere.

I think we should look at how housing costs could be incorporated. I think Jens Weidmann, the other day, said that he was prepared to accept some imperfections. The issue is that it’s complicated to work out how to do it but my gut feel right now, but I do want to look at this in the review, is those imperfections are probably acceptable.

The main thing here is it’s not how you do it. It needs to be done and the likelihood is… We’ve got to wait and see but the likelihood is how we do it won’t be perfect but I think – this is what Jens was saying – the imperfections will probably be acceptable if we end up with a measure of inflation that actually means something to people, relates something to people.

Now, I’ll come back to how you manage the transition from one definition to another and how you manage if you’re going to change in terms of explaining the target, managing that transition but I think the key thing is credibility, for me, and connecting much more with people.

Just going back for a minute to the narrative point that we were talking about earlier, I suspect that some of the people in Ireland who answered the Commission’s survey probably own their house, have paid off their mortgage, but every day they read their newspapers that tells them house prices are going mad, everything is going up, rental costs have gone up, we’ve got the most expensive mortgage rates in Europe.

So, their narrative is that inflation must be at 6 or 9 per cent or something even though, in practice, unlike others who may be paying extra rent, in practice, nothing has changed but the narrative is very strong, hence just my point earlier and which I make in the speech, that for effective central bank communication you’ve got to understand the narrative in which your message is being received, is being landed. And, the target, itself, could it be clearer? Well, I think it could.

Martin Arnold: You make that pretty clear and that it is confusing.

Gabriel Makhlouf: Yes, I think it could. Well, it’s obviously an important thing that we’re going to be looking at in the review. Now, how we transition – because you asked me that – how you transition from where you are to something else matters a lot but explaining it will be the key thing. I think, if we decide that we should move, whether it’s the measure of inflation or the target itself…

Martin Arnold: Or, both?

Gabriel Makhlouf: Or, both, we will have done so because a lot of evidence would have been presented to us or we would have collected from our various discussions and I think we just need to make sure that the case for that change is communicated very clearly to everybody so that it’s well understood and I suppose that people aren’t confused why we’ve changed.

Ultimately, as I said, I think if – and it’s an if – if we’re going to change, we’re doing so because we think it’s going to enhance credibility, enhance trust, enhance effectiveness.

Martin Arnold: A lot of people are talking about this. It seems like there are various options on the table that people have proposed but the one that most people seem to be gravitating towards is just to go to a straightforward 2 per cent target, which is the one that the Fed has and the one that Bank of England has. 

But, you then have, as you’ve said, I think what you’re referring to is you’ve got an explanation problem, you’ve got a credibility problem because you’re struggling to even hit your target of below but close to 2 per cent. So, why should be believe you’re going to hit the higher target; effectively, a higher target. Do you see what I mean?

Gabriel Makhlouf: Yes, I see what you mean and I think there are two responses to that. One is the first one, the one that we talked about earlier, which is the importance of making sure people understand why we’re below, that whole engage, explain, educate.

The other thing, I think, is this issue which I flag in my speech. Is a focal point of two more credible than a range which might have two in the middle? I’ve got no view on the range. You could argue 1.8 or 2.2 for the sake of argument or two in the middle. Is that more credible than two on its own?

In fact, I think my speech has a footnote that references the FT’s leader. I think there was a leader or opinion piece on this, anyway, in FT – I don’t know if you read it – in the last couple of weeks which actually promoted the idea of a band has been.

We need to just ask the question do we think this is more credible? And, my gut instinct is that a range with a focal point of two, is that just a little bit more credible than just two. It’s just that little bit more easier to explain to people.

But, I’m open-minded on this. I want us to have a good debate on it and a good discussion and listen to people. That’s going to be quite an important part of the whole engagement.

Martin Arnold: This debate is clearly fascinating for somebody like me, for people here, economists, central bank watchers, ECB watchers. We could talk about this for hours. I could sit here and talk to you for another several more hours and not run out of things to ask you about it. But, the man in the street, the man in Southwest Ireland who is doing a course on technology in some institute, does this resonate?

Gabriel Makhlouf: You mean the actual target?

Martin Arnold: Yes.

Gabriel Makhlouf: No, it doesn’t.

In all seriousness, when we do the engagement exercise that we’re going to be doing, certainly in Ireland, it’s going to have different components. Some of it will be with the public, some of it will be with academics and the like. I think the discussion about below or close to versus points and ranges and all the rest of it, we’re probably going to have a discussion with the academics on that.

Martin Arnold: I think the public, where you do need to do more work personally is why do we need a certain amount of inflation? What’s wrong with zero?

Gabriel Makhlouf: Yes, that’s right.

Martin Arnold: Because you want price stability. Isn’t price stability zero? I quite like the idea of zero because then I don’t have all this house price inflation.

Gabriel Makhlouf: That is our challenge. I think that is one of our challenges and that’s part of the discussion we’ve got to have with the public. I have to say, with the public, I’m particularly interested in just listening to what’s on top of their minds on stuff.

I’ve just been struck – just digressing a bit – by what Jay Powell and Mary Daly, who happened to be in Dublin a few weeks ago, a couple of weeks ago, said about the Fed Listens exercise, which is how it helped them to learn more about the US labour market.

They didn’t go out there thinking they were going to learn more about the US labour market, so I’m just wondering what is it that I’m going to learn more of. So, that’s the way I’m approaching this.

But, I agree with you – just getting back – I think we went through this period for quite a long time facing the challenge of getting inflation down and explaining to people why it was important to get inflation down, and we’ve now got the reverse and I think the reverse is harder but we’ve got to meet that challenge and we have to explain to people.

And, part of it actually is that when we talk about price stability, we tend to stop there. We tend to say price stability is important and everyone agrees and we say, and our definition is whatever it is, close to or below, but we don’t go on to say what does that mean. Why is it there?

And, if you think about it, monetary policy’s role is really about helping to manage the business cycle. What is it that means something to people? So, telling a bit of a bigger story which helps them understand and therefore we’re at two. So, why would zero be a bad a thing?

Martin Arnold: Well, it’s also about explaining the reason why deflation is so bad for an economy.

Gabriel Makhlouf: Yes, it is. So, why is zero not the sort of target you want? Because it increases the chances of deflation. And, why is deflation bad? So, it’s those explanations, for whatever reason, we don’t really make them and I think we’ve got to think about it.

In Shiller’s book, he’s got a section in his book where he talks about the sort of immorality narrative. I can’t remember what he called it now. It’s something like the immorality narrative of inflation which ran through the 50s and 70s in the US and inflation was this really, really bad immoral thing. And, that’s sort of ingrained in everybody and, obviously, in Germany they’ve got another historical reason why; all that.

Those narratives are really powerful, so trying to take the reverse narrative is an incredible challenge but I think we need to meet it. One reason why interest rates are low is there are a bunch of factors that are just driving prices downwards – demography, natural rate of interest – which I’m not going to discuss when I go out talking to the public.

But, the challenge of communicating low inflation is present and it’s real and it isn’t one that we can just assume is going to disappear quickly and actually communicating much more clearly why it’s a challenge and why we want it up may actually help us, in turn, to set the right sets of expectations and support it moving in the right direction faster.

Martin Arnold: Another way to potentially put the ECB on the side of the angels and win perhaps more credibility, legitimacy is on climate change; one of the of the big issues of the day and certainly something that Christine Lagarde has talked quite a lot about already and she wants to be part of the review.

How much do you think a central bank can do in this area, given that a lot of people say it’s a very important issue but it’s not an issue that central banks should be concerning themselves with because the ECB’s mandate is price stability? 

Gabriel Makhlouf: I completely understand where those views are coming from. Certainly, from the Central Bank of Ireland’s perspective, there’s quite a lot we do but there are also limits to what we can do. So, what can we do?

Part of my mandate, part of the Central Bank of Ireland’s mandate, the strap line is protecting monetary and financial stability and the reality is that climate change is going to affect the assets and economic models of not just the financial institutions in Ireland and across the EU but actually the economic models of most businesses in the EU and ultimately most individuals believe in the EU.

So, I think it is absolutely a core part of financial stability which is related to price stability. I don’t think you can separate them. I think we’ve got it wrong and we’ve got to be sophisticated in actions that, in the end, we decide to take as central banks.

We’ve got to be able to distinguish between what are the things that we can do and what are the things, ultimately, that are really about political judgments to make. So, the pace of transition to a low carbon economy, that’s really a political judgement to make.

I would be one that will be calling for us to make sure we don’t lose sight of our main responsibility. The ECB is price stability. In Ireland it’s monetary and financial stability.  We’ve got to make sure we do that and we don’t get drawn into trying to solve the problems of climate change which are really the remits of governments, ultimately.

Martin Arnold: Just to take one obvious area, the ECB buys a lot of assets through the QE programme. How much of a climate filter and either a negative for brown and a positive for green assets – and you can have the debate either way on those – but how much of a green filter should the ECB apply to those things?

Gabriel Makhlouf: I don’t know.

Martin Arnold: Is that going too far or is that an area you should look at?

Gabriel Makhlouf: I think it’s an area we should absolutely look at. Where we’re going to land is less straightforward. There are two things I’d say in response to that, Martin. One, is that however you look at it, you need to then ask the question what decision do I need to make to support price stability and financial stability and not, well, I’m going to do X because the governments are not doing something. I’ll come back to the role of governments in a minute.

The other thing, and I do worry about this right now, is do we all have the same view of what is green and what isn’t and that’s quite a big issue and I don’t want us to rush into concluding that it means X when actually it’s something else.

Martin Arnold: For instance, nuclear power. The French and the Germans might have a different view.

Gabriel Makhlouf: Isn’t that an interesting issue? That is a really interesting issue but we need to do the work. Central banks have to operate in the sort of reality of the economy that we have and the economies we have across the world, to a larger and greater extent, the world is committing itself to reducing carbon emissions and to moving to a low carbon world. A lot of them are setting themselves targets. We’ve got the Paris Agreement.

We’ve got some countries who don’t want to be in the Paris Agreement. If you take the United States for example, at a federal level, it doesn’t want to be in the Paris agreement but big economic centres in the United States are saying they’re going to reduce their emissions.

So, the central bank has got to say, well, the world we’re living in is moving in this direction and that has implications for the assets and the economic models, the system that we regulate, the world that we try and set price stability in. How do we take this into account?

So, our models have got to take into account what is happening in the world, so we can’t ignore it. My point about governments is that it is important that central banks continue, in terms of their own actions, we need to take actions that we think are important to deliver our mandate and we’ve got to be cautious and careful that we don’t get sucked into doing things because others aren’t taking the necessary action.

Martin Arnold: Do you sense that there is a danger of overburdening monetary policy? You’ve talked about how you need to define the limits of what monetary policy can do and what it can’t do and fiscal policy needs to take up the strain.

Gabriel Makhlouf: I think it’s more than fiscal policy, by the way. I put it in the speech. I think I say what structural reform do we need to make the economy work better and, by inference, support monetary policy? It’s more than just a fiscal question but is there a danger in overburdening monetary policy? You mean in the green agenda or elsewhere, more generally?

Martin Arnold: Generally. The green agenda is just one example of that but if, for instance, the coronavirus - it seems as though financial markets, as soon as there is this shock that emerges, the almost knee-jerk reaction is central banks need to do something.

Gabriel Makhlouf: And, I understand why that happens and it partly reflects the importance.

Martin Arnold: Even though it’s, as you’ve said, not even clear that a further easing of monetary policy would actually go much to help practically in terms of a shock to the supply chain.

Gabriel Makhlouf: The most important thing on coronavirus right now is health and to support the health system to fix it. There’s always a danger that because monetary is so important, plays such an important role in the way economies operate, there’s always a risk that people will expect too much of it, which brings us back to my speech which is the importance of communicating well, the importance of building credibility, building trust and, as a result, building effectiveness; the importance of transparency; the importance of not just having your own narrative but having a narrative that resonates with people, that actually is the right narrative; understanding the narratives that are playing out around you when you communicate; not allowing the wrong narrative to emerge; and, certainly, not leaving vacuums because they will always get filled.

And, I think the more we can do on that score, the better placed the world will understand as to how much they can expect from monetary policy and what’s reasonable.

Martin Arnold: And, final question, we’re sitting here in Germany where, as I mentioned earlier on, the country is in the midst of political uncertainty of several of the main parties, the governing parties. In Ireland, you’ve got uncertainty over when there will be a government being formed. And, similar, in Spain, you’ve a got a minority government. In Italy you’ve got a fairly weak coalition government.

Politically, it doesn’t feel like Europe is in the strongest place. It doesn’t feel like Europe is in a great place at the moment for bringing forward new, ambitious projects from governments. Does that put more pressure on something like the ECB to pick up the slack?

Gabriel Makhlouf: I’m not sure I agree with you that at a European level… Whatever may be happening domestically in different countries of Europe, I’m not sure that automatically translates to some sort of blockage or challenge operating at the European level. I can only really speak from the experience of Ireland.

The debate in Ireland is actually about Ireland, it’s not about Europe. Ireland sees itself at the heart of Europe, very much a part of Europe. So, I don’t necessarily agree with you.

I do think that institutions like the central bank, important institutions, have a leadership role and have a responsibility to deliver their mandates and play their part but I’m not sure that what’s happening domestically in various countries is really changing that. I think that should be… well, it is, I think, part of our role, part of our mandate, part of our responsibility.

Martin Arnold: Okay. I’ll frame the question slightly differently then. We live in a world of growing populism and protectionism. Nationalism is emerging in several political systems in various countries in various forms. We’ve seen that with the trade war. There is this growing populist movement.

Does this political shift raise concerns with you about the legitimacy and the support that the ECB has as an institution, the need to kind of shore that up in these more, perhaps, populist times?

Gabriel Makhlouf: I have a general answer to your point which is I think, because you’re specifically talking about central banks, I think central banks, we should never take our independent status for granted. The fact that the central banks’ role and my own is all set out in the Treaty of Rome, we shouldn’t just take that for granted. We need to earn our position.

I’m not making a legal point here. I’m just back to the fundamentals which is to deliver our mandate we’ve got to build credibility and trust… sorry, we need to have credibility and trust, and we need to earn that by our actions.

And, I think, if we do our job well then, actually, people will… the way to strengthen us is for us to do our job well, that’s my point, irrespective of populism or not, that’s the important point.

I think even if we were in a world where there was no populism, etc, etc, we should still be focused on earning the trust and the credibility of the citizens of Europe because that’s the way of enhancing our standing and the stewardship responsibility as leaders that we have, actually, as governing council members.

Martin Arnold: That’s a good place to end it, I think. Thank you very much.