Budget should not fuel inflation – Central Bank Governor

The Government should avoid fueling inflation with its Budget 2025 package, the Governor of the Central Bank has said.

Speaking on RTÉ’s Morning Ireland following the European Central Bank’s decision to cut interest rates, Gabriel Makhlouf said it was “quite important that Government pays attention to what impact its policies will have on domestic prices”.

He said cutting taxes or increasing spending could add to consumption in the economy and – if supply did not rise to match that – it could “potentially add to inflation”.

Though he said the detail also matters, as the manner in which taxes are cut – or how additional spending is allocated – can have an impact.

Governor Makhlouf said he would be writing to the Minister for Finance Michael McGrath in the coming weeks to outline his thoughts on what should be done in the upcoming Budget.

“My number one concern is to make sure that the budget supports the ECB’s monetary policy decisions, that doesn’t act in a cyclical fashion to fuel Irish inflation,” he said.

“What we do in Frankfurt is decide on interest rates to manage prices across the whole euro area and not for Ireland in particular.”

When asked why it was important that the Government adheres to its rule of increasing spending by no more than 5% each year, Governor Makhlouf said it was ultimately about credibility.

“The Government has set its own rules, and I think it’s important the Government keeps to its rules,” he said. “It’s a test of fiscal sustainability… you set this rule and you stick to that number, that has been my view.”

The Government’s spending rules differ from the European Union’s fiscal rules, which are based on a country’s GDP.

Governor Makhlouf said that, as Irish GDP is distorted by the activities of multinational firms, it is not a good metric by which to measure activity here.