ECB’s Makhlouf warns more rate hikes risk hurting growth

European Central Bank policymaker Gabriel Makhlouf cautioned on Friday that raising interest rates "a great deal more" could carry real costs for economic growth, even as a prolonged conflict in the Middle East threatens to keep inflation elevated.finance.yahoo+1

Makhlouf, who serves as governor of the Central Bank of Ireland, published his remarks in a blog post on the Irish central bank's website, one day after the ECB raised its key deposit rate by 25 basis points to 2.50% at its September meeting in Berlin.global.morningstar+1

A Balancing Act on Rates

"There remains significant uncertainty to the outlook," Makhlouf wrote. "The near-term driver of elevated inflation remains energy. A drawn-out conflict in the Middle East risks keeping inflation elevated for a long period. But the other side of uncertainty is that raising rates a great deal more from here could carry real costs in terms of growth."wkzo+1

His comments highlight the tension within the ECB's Governing Council as it navigates between persistent inflation pressures and slowing economic momentum. Thursday's rate increase was the second hike of 2026, following a June move that ended a cycle of eight consecutive rate cuts. The decision received unanimous support from the council, though officials did not commit to a predetermined path for future rates.gurufocus+2

Inflation Driven by Energy, Not Demand

The ECB's latest staff projections see inflation averaging 3.0% in 2026, 2.5% in 2027, and 2.1% in 2028, with the 2027 and 2028 figures revised upward from earlier estimates. ECB President Christine Lagarde said Thursday that "the conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period."global.morningstar

Sources told Reuters that policymakers expect further tightening in the months ahead, with a move possible as early as the October 29 meeting. Markets are currently pricing in roughly two more quarter-point hikes by mid-2027.morningstar+2

Growth Concerns Mounting

Makhlouf's warning underscores a growing concern among some ECB officials that the central bank risks overtightening at a time when the eurozone economy remains fragile. ECB staff revised their growth forecast for 2026 to just 0.8%, with a modest pickup to 1.2% expected in 2027. The rate-hiking campaign, driven largely by supply-side energy shocks rather than overheating demand, has prompted debate over whether higher borrowing costs will do more harm than good in dampening growth without meaningfully addressing the root cause of inflation.ecb.europa