gabriel makhlouf : monetary and fiscal policy in times of inflation remarks by mr gabriel makhlouf, governor of the central bank of ireland, at the dubrovnik economic conference, dubrovnik, 27 may 2023. * * * the current macroeconomic environment is a complex one for policy makers. the outlook for inflation continues to be too high for too long : this means there is more ground to cover for central banks. monetary policy must be brought to levels sufficiently restrictive to bring inflation back to target in a timely manner. meanwhile fiscal policy must adjust its priorities to tackle the challenges of the major economic transitions involved in climate change, ageing populations and geo - economic fragmentation. but the increased cost of living generates political pressures that could slow this necessary adjustment. monetary policy fights inflation mostly through two channels : first, by reducing aggregate demand, and second, by anchoring the expectation of future inflation to its target. at times like this – when inflation is already far too high – expansive fiscal policy risks undermining both of these mechanisms. primarily by increasing aggregate demand, but also by signalling that the government is counteracting the effects of policies aimed at reducing inflation, potentially increasing inflation expectations. this is why i and others have previously called for cost of living supports to be targeted – i. e. at those most vulnerable to energy price shocks, temporary – so as not to add to persistent price pressures, and tailored - thus enabling further resilience to maintain sustainable growth in living standards. fiscal policy can be a major force for good, when it provides the stable foundation for a thriving economy, but it can also cause great harm by adding to inflationary pressures, which would inevitably call for an even stronger monetary policy response. monetary and fiscal policies need to work together to shore up macroeconomic stability. the coherence of monetary and fiscal policy is essential for macroeconomic stability. during the pandemic, we have seen how powerfully combined monetary and fiscal efforts helped our economies quickly get out of recession. but it is not only during downturns that monetary and fiscal policy need to coordinate their actions to effectively complement each other. an adequate policy mix is just as essential at times like this, when we must fight inflation. at a minimum, fiscal policy should avoid directly contributing to the building up of inflationary pressures. but preferably, fiscal authorities should support the disinflation effort by gradually bringing down high public debt, while also calibrating their policies to make

. and after those remarks, my team and i will be happy to answer questions. it is important to note at the outset that the review does not aim to provide an economic 1 / 6 bis central bankers'speeches forecast, but instead focuses on the potential for negative outcomes to materialise. * * * risks to financial stability the irish economy is one of the most open economies in the world for trade and finance. being open creates significant benefits in terms of jobs, economic growth and exchequer revenues. but it also creates risks, particularly to developments outside of ireland. and, at the moment, many of the risks we are concerned with stem from abroad. the most obvious risk facing the irish economy and domestic financial system is the continued possibility of a disorderly brexit. although that risk has receded, it hasn ’ t gone away. and a disorderly brexit could lead to a lot of uncertainty, volatility and disruption if it were to materialise. much has been said already on this subject, so i won ’ t dwell further on it. other key risks we see on the horizon are abrupt shifts in international trading and tax arrangements. the small and highly globalised nature of the irish economy means ireland is highly integrated in global supply chains and relies significantly on investment by foreign multinational enterprises. a further escalation in global trade wars, combined with shifts in the international tax environment, could have material effects on ireland. therefore, the announcement by the minister for finance yesterday is a welcome development. it is important that ireland builds buffers to ensure the public finances are resilient to shocks, and the government has sufficient room to manoeuvre should any materialise. building buffers in the good times limits the costs of future downturns. another key source of risk i want to flag today is from developments in global markets. global financial conditions remain very accommodative. this has resulted in the continued buildup of debt levels around the world alongside a prolonged period of easing credit standards in parts of the global corporate debt market and increased risk - taking by the non - bank financial sector. what we are mainly concerned with here is the impact of a sudden reversal in risk appetite which could lead to sharp falls in asset prices, for example. but not all risks are from abroad. closer to home, new lending has continued to grow. new household credit is growing at the highest level in a decade, and we see the domestic banks increasing their lending to large businesses