Now to deepen that discussion, Governor Makhlouf will join Mr. Hernandez de Cos on stage with Deputy Governor Sharon Donner to discuss this theme. Thank you.
Well, good afternoon, everyone. Good Lansdowne Road. It's Sharon Donner, Deputy Governor at the Central Bank of Ireland. It's my pleasure to welcome you all here today, along with my colleagues, many of whom you've met already this morning. And if you were here last year, you'd have heard me welcome you to Lansdowne Road then as well, because I'm a Dub, and for me coming here is always coming to Lansdowne Road, not to the Aviva Stadium. So it gives me great pleasure to chair this panel discussion now with Governor Makhlouf and my friend and former colleague at the ECB, Pablo Hernandez de Cos. And just a reminder that we will hopefully have an opportunity to take some questions near the end, after I start off the panel discussion. So have a few minutes to think of some questions if you would like. For those who are in the room, as Denise said earlier, you'll be able to raise your hand, and if you're online, you'll be able to put your questions into the chat, and they hopefully will magically appear here on the iPad beside me. So thanks so much, Pablo, for coming to Dublin to join us today. Thanks also for really fascinating remarks about, I think, just one of these big trends that we've been hearing about today that's affecting the economy and the financial system. And I was very interested in this way in which you described how some of these issues are, of course, new risks and new things that we have to think about, but in some respects are manifestations of things we already know a lot about, like governance and risk management, for example, which remain absolutely critical. But before we get back to those, maybe I'd start by asking both of you, but first Pablo, about one of the number one topics that has been on the mind of central bankers globally for the last couple of years, and that's of course inflation and interest rates. So I know you're not a member of the Governing Council anymore, but obviously you're a very experienced central banker, and you will be taking up your new role, of course, at the Bank for International Settlements in a few months. So after this sort of rapid and coordinated tightening that we've seen globally of interest rates, and in many countries around the world we see inflation now broadly returning very close to central bank targets, so do you think it's time to declare victory?
Well, what I would say is that the disinflationary process is well on track. We've seen the decline in inflation over these quarters, which we know is a combination of different factors. For sure, the impact of monetary policy tightening, but also, of course, the fact that many of the shocks that were behind the inflationary shock back in 2022, 2023 have already dissipated. And it's not only that inflation is now close to 2%, but it's also that when you look at the forecast that was provided by the staff of the ECB to the Council back in September, it is also the projection that this will move in a stable manner to 2% in the medium run. And I think it's important to recognize that in the last eight quarters, we've all gained a lot of confidence on forecasts. So this is why I think we are well on track. At the same time, the level of uncertainty is very high. There are many risks on the horizon on both sides that could, let's say, put inflation higher than the ECB target, but also lower. And this is why the recognition by the Governing Council of being state-dependent, data-dependent, I think, is a wise one.
Okay, thanks very much for that. And obviously, Governor, you remain a member of the Governing Council, and there's one more monetary policy meeting, I think, this year. So what's your view on that? Are you confident that the job is done and that we can move out of restrictive territory now?
Oh, I don't think the job is done. I think Pablo spoke like a current governor. I don't think the job is done. I think the job is well on the way to being done, but I don't think at the moment, I don't also feel at the moment the need to rush in any way to get the job done. You see what I mean? I mean, I think I made some remarks last week or ten days ago which basically said, you know, we're at a moment of time where we need to behave like a good long-distance runner. You just need to pace yourself. You can see the end, and there's absolutely no reason why you should suddenly start sprinting in some crazy fashion to get to the end. At the moment, I mean, I think services inflation is still slightly higher than I would prefer to be able to start declaring victory. But we should be confident that what we've done over the past few months has seen us move towards target, and I don't think anybody is thinking that inflation is going to move in the wrong direction and we should sort of reverse our actions. But it's a question, I mean, my own personal view is that prudence and caution have got a bit of premium going to them, and we should continue in that manner.
Okay, many thanks. And Pablo, just one last aspect maybe about inflation. So you sat in the Governing Council obviously as a governor, but you had previously sat there as an alternate. I was sitting beside you at the time. It's not that long ago that we were there, and what we were talking about was the zero lower bound. We were more worried about deflation than inflation, and now we're in a completely different environment. You know, we had been talking about low for long, low forever, for example. So when you look ahead now, do you think it's possible that we could go back to that kind of era of very low inflation, or do you think something more fundamental has changed, maybe structurally, in the economy?
Well, I think that's a very difficult question to answer. What is obvious is that the market thinks that we are in a different era. When you look at long-term interest rates, they are significantly higher than they were before the pandemic. And I think this is an important message to be given, that in principle we should not be expecting rates on a structural manner to come back to the levels that we had before the pandemic. And by the way, that could also be a good thing. But I think it's also, in parallel, very important to emphasize the level of uncertainty. And let me give you just one example. One of the main determinants of this concept of natural interest rate, R-star, whatever you want to label it, is productivity. And when you look at the potential drivers of productivity in the economy, there are maybe potential very good news on artificial intelligence and the impact of artificial intelligence that will probably increase productivity in a very significant manner, and therefore also R-star. But at the same time, the risk of moving to trade war and deglobalization is also very high, and this would imply for sure lower productivity. So which of these two forces in the end will prevail, we don't really know. And this is why I've always defended that, okay, the use of R-star is nice, is good, maybe even for communicating where interest rates are at each moment as compared to R-star, I think it could be useful. But in terms of monetary policy making, let's say, on taking decisions, I think this is less useful. And by the way, there is a long literature on uncertainty around R-star that precisely goes in this direction, in the direction of downplaying this concept.
Okay, thanks. And maybe that's a good segue into maybe a different topic. So we heard this morning when we were chatting with Minister McGrath discussions around the Draghi report and the Letta report, and of course both of them focus a lot on productivity and indeed on competitiveness. And I think we hear a lot now about competitiveness and particularly maybe a changed or shifting narrative about regulation. It's almost hard to believe that it's only eighteen months ago since we had the failures of SVB and Credit Suisse, but nonetheless we're hearing talk about rollback of regulation, potentially deregulation of the US under the new administration. So you were obviously the chair of the Basel Committee, Pablo, which is the committee which is the global standard setter for bank capital around the world. It is, of course, situated at the BIS, where you will be going in a few months. So what's your view of the current debate, and would you be concerned that the post-crisis reforms are in jeopardy? And I might ask you for a view on the same issue, Governor, in a moment, which you also touched on in your opening remarks.
Well, first, of course, I think we should all recognize that financial stability is a global public good, and this means the only way to guarantee this public good is through global cooperation and through international standards. My perception is that within the Basel Committee, for sure, till June when I left, there was a strong consensus on the need for implementing Basel III. And when you look at the world economy and the different jurisdictions, the degree of implementation has been very significant. It's true that there are some important jurisdictions that are still pending, but my hope, my expectation, is that they will finalize this implementation in the coming months. It is absolutely critical, and I think also the developments that we experienced back in March last year, I think, is another example of how important this implementation is. So I hope this is done, and this is done as quickly as possible.
Okay, thanks. Governor, I think, I mean, I agree with Pablo. I think, I mean, I personally don't see a particular disjoint between good regulation and competitiveness, because I think good regulation is all about making sure the system can continue to support a changing economy, because economies are rarely static. If they are, we're all in trouble. And good regulation, good supervision is about understanding that, is about understanding what new developments are, and making sure that ultimately they enable the financial stability, which is fundamental, as I said earlier, which is fundamental for everything else to happen. So we're clearly seeing a debate which is largely driven, the noise in particular is largely driven by particular self-interested areas, and we just need to be very clear, firstly, in understanding what's happening, and secondly, in communicating our approach. We have to also be open to the fact that sometimes we get regulation wrong, and we've got to be humble enough to accept that. We want to learn, you know, from everybody, so that we do the right thing. But erasing the bottom ultimately is to everybody's disadvantage, and no one wants that.
Very good. Okay, so we have about ten minutes left. So let me see if we have questions here from the floor. If anybody would like to raise their hands, there's a question at the very back there. So we've got a microphone.
