Since the crisis began last March, precipitating an inexorable, yet painful, wave of shutdowns and restrictions, Gabriel Makhlouf has been assessing the various economic data streams that are available to the Governor of the Central Bank of Ireland. And one thing has struck Makhlouf deeply: the juxtaposition between the macro and the micro. 

The Irish economy, and the tax take that flows from it, both showed remarkable resilience in 2020. In GDP terms, admittedly a number skewed by the high volume of pharmaceutical and technology multinationals operating here, Ireland was the best performer in the world last year. And, as the vaccine rollout begins, the Central Bank is predicting a return to growth, with new forecasts pointing to a 2.9 per cent surge in domestic demand this year, and a figure of 3.6 per cent in 2022. 

But lurking beneath this decidedly macro picture is the more challenging micro story. Unemployment will rise from 6.2 per cent in 2020 to an average of 9.3 per cent this year before declining to 7.8 per cent in 2022, a rate well above the pre-pandemic level of about 5 per cent. And many of the newly unemployed come from low paid jobs in retail and hospitality. Those are the very people now struggling to pay the mortgages or fund their rent. 

The economic divide is not a new phenomenon here. It was the catalyst for the rise of Sinn Féin’s populism in the last election, with many occupants of the middle feeling locked out of the glistening economy they were hearing so much about. The crisis, however, has widened the disconnect between the macro and the micro. 

“The impacts on particular sectors are serious. The potential impact of unemployment and the whole issue of non-performing loans is something that concerns us,” Makhlouf says.

But Makhlouf, who assumed the position in September 2019, also knows hat the macro success is helping finance the vast subsidies and supports that the government has implemented over the course of the pandemic. 

Over our lengthy interview on Monday morning, he tells me that those “short-term” supports are as important as ever. However, he strikes a note of caution about permanent increases in expenditure in areas like health. The government, he says, “needs to think carefully about how they’re going to fund it”. 


Gabriel Makhlouf is wearing a crisp white shirt when we meet virtually, and his beard is neatly trimmed. Later in the day, he is scheduled to give a major address to the economics department at the University of Limerick on the Central Bank’s priorities for 2021. Earlier in the day, he had published a blog reflecting on 2020 entitled: “A year to remember and a year to forget.”

It was certainly not the year he was expecting after only joining the Central Bank in September 2019. While his immediate processors, Philip Lane and Patrick Honohan, were parachuted into the governorship from academia, Makhlouf arrived from New Zealand, where he was secretary at the treasury department. The sentiment in government at the time was they wanted more an administrator than a theoretical economist, as the size and scope of the Central Bank has increased dramatically since the financial crisis a decade ago. 

His background is diverse. He was born in Egypt to a Cypriot-British father and Greek-Armenian mother. But he speaks with a strong British accent. 

Over the course of the interview, the governor reflects up the changes in cultures between the countries he has worked in (he was once private secretary to then British chancellor of the Exchequer, Gordon Brown), and on what has struck up about his new job.

But he also talks at length about a range of other topics, including: 

We begin, however, with his outlook on the Irish economy, particularly the juxtaposition between macro and micro. 

Ian Kehoe (IK): I read your speech at the University of Limerick. It struck me there were two different strands to it. On one side, there are positive noises about strong economic growth, strong export growth arising out of Brexit being resolved and strong demand in Q2. Everything on the macro side seems very positive. The concern is on the micro side – you are talking about non-performing loans, the overhang of individual debt and a very interesting point about the unemployment rate. Are you concerned about that juxtaposition – between the macro and the micro?

Gabriel Makhlouf (GM): I mean I think it’s a striking feature about what’s been happening in Ireland over the last year. And Q2 last year, we probably had one of the biggest impacts in terms of falls of domestic demand of any of the EU countries. And yet, because of what’s happening to exports, we’re likely to end last year with a positive story of GDP generally. It might even be the best in GDP terms, which I know is full of anomalies – we may be one of the best performances in the EU. So, it is a very odd juxtaposition. 

Am I worried? Well, it’s better to have that story than to have both domestic demand crashing and exports crashing, so we could be in a worse position than we are. The unemployment story is worrying. It’s not a shock, it’s not a surprise. There’s normally a lag anyway between big drops in GDP and seeing them feature in the labour market statistics. I mean it just underlines, from my perspective, the importance of maintaining those policy supports because, at the end of the day, the fact that at a macro level we’re doing okay is helping the State in terms of revenue collected. And there are a lot of people still in employment which we mustn’t forget. But certainly, the impacts on particular sectors are serious and the potential impact of unemployment on the whole issue of non-performing loans is something that concerns us. 

IK: I’ll come to non-performing loans in a moment. But you mentioned in relation to certain sectors that we’re struggling and I’m thinking retail and hospitality. They’re the ones with the high levels of employment within them. I know we’ve seen employment maintained and rise in multinationals, but the vast bulk of people without university educations are working in retail and hospitality and I suppose there are big fears that an awful lot of those jobs just mightn’t come back. 

GM: Indeed. I think the really interesting question is what’s going to happen to retail. I think on hospitality, my own view is that’s a question of time because it’s hard to see the hospitality that we have been used to as a society disappearing. So, individual businesses may close, new ones may open up. I think hospitality is an issue of time. 

I think retail is more interesting to the extent whether people’s habits, their e-shopping habits, are now going to become permanent or are they going to revert back to enjoying physically going into shops. So, I think there’s a slightly different issue. But certainly, the unevenness of the impact is as you say, it’s those particular sorts of jobs. It’s a particular age group, it’s a particular gender as well. It is concerning, let’s not pretend it isn’t. The macro picture just helps in two things. One, it just helps us to manage the impact of the near term a bit better. But it also gives us a bit more hope for the medium-term and coming out of this. 

Gabriel Makhlouf: “My last job was in New Zealand where the whole focus was on getting net debt down to 20 per cent of GDP.”

IK: One of the other things that struck me from the speech, Governor, was in relation to government spending and deficits. You drew the comparison between what is the short-term immediate spending – and I’m thinking things like wage supports – versus spending increases that have gone into the system permanently. What level of concern would you have about our ability to maintain that sort of more entrenched spending in the long term?

GM: Well, as a country, the State has gone into this crisis in a relatively robust position. On the other hand, you know, it still has levels of debt that, certainly for someone like me – my last job was in New Zealand where the whole focus was on getting net debt down to 20 per cent of GDP – coming back to Europe and familiarising myself again with numbers that are much higher than that has taken a bit of time. But the reality is that in our debt levels, we’re not at the extremes of other European countries, which is a good thing. I’ve heard people talk about being in the middle of a pack. I mean that is a good thing. 

The short-term increase is the wage supports etc. I’ve made it very clear, I did it last year and I’ve used the words: They’re both warranted and necessary. But at the end of the day, if you want to spend more, whether it’s on health or whatever, you need to make sure you have sustainable sources of revenue to finance that spending. And so, governments just need to think carefully. I’m not saying they can’t do it. I’m just saying that they need to think carefully about how they’re going to fund it. I mean that’s the key thing. 

IK: It brings me back to a point you made at the start about Ireland’s GDP level being so high. We have seen an immense increase in corporation tax and when we talk about why Ireland’s doing well, it’s largely as a result of corporation tax. There are two points about that I’d like your views on. One is the increasing consolidation of a large number of very large taxpayers within the context of potential changes around tax. And I’m not looking for you to comment on the policy issues around that tax, that’ll be negotiated elsewhere. But even the minister for finance has talked about that as a massive potential issue. As you said, we’re fine at the moment but the world is changing. 

GM: The Central Bank has flagged, my predecessors have flagged, Philip Lane in particular, the risk of over-relying on corporation tax as a source of revenue. To be fair, the minister himself has flagged this and was conscious of it. So, concentration risk is definitely an issue for us. With corporation tax in a small open economy like ours, corporation tax paid by multinationals in particular, concentration risk is even more acute I suppose. 

“I’m really not going to comment on international tax reform, but a lot of the manufacturing activity here relies on skilled people, on investments already made, on know-how, on access to the European market. A lot of that may continue.”

And we’ve just got to be very careful from my perspective about the extent of planning the public finances around it. Having said all that, I think there is a difference which external observers of Ireland’s corporation tax system tend to not understand which is that actually a lot of activity is here, it’s shown in the GDP numbers, in the export numbers. It is real manufacturing activity. You know, real people manufacturing real things, especially in pharmaceuticals, and selling them. So, it’s you know, if tax rules change, my guess is that setting up an operation of that sort in Ireland on the part of large multinationals is something which they think about very carefully and invest a lot of time in making their original calculations to invest in the country. I think that applies to unwinding it.

I’ve heard this from some quarters, that it’s partly a historical sort of view, that Ireland’s corporation tax is really the result of financial flows and financial transactions and all the rest of it. People don’t know the real activity that happens here. What it might mean for the future – not might, I mean I think there’s a good case for it – is that it remains something that, and as you say I’m really not going to comment on international tax reform, but a lot of the manufacturing activity here relies on skilled people, on investments already made, on know-how, on access to the European market. A lot of that may continue. That doesn’t take away, however, the importance of managing the revenue itself in a sustainable way, in particular in planning in a sustainable way. So, I think what we at the Central Bank have said in the past and in fact, as I said what the minister himself was doing in the past, I agree with that and I continue to agree with it.

Multinationals, tax and property

Makhlouf joined the Central Bank at a time when legislative changes profoundly altered the financial flows directed in and out of Ireland by multinational companies. The end of the double Irish tax scheme and US Tax Cuts and Jobs Act enacted by Donald Trump at the end of 2017 have pushed American firms to repatriate hundreds of billions of euros in profits accumulated through past Irish structures and to onshore similarly staggering amounts of intellectual property value in this country. Ireland has also become a global centre to funnel profits from one jurisdiction to another through intercompany debt

The same tools, exemplified by so-called Section 110 debt securitisation vehicles, first facilitated the acquisition of Irish distressed debt by overseas funds. The same firms are now using Irish brass-plate subsidiaries to acquire loans and properties in the Mediterranean and as far away as China. With a new wave of non-performing loans expected to emerge from the Covid-19 crisis, vulture funds are now circling again – unless, as suggested by European Commissioner for Financial Services Mairéad McGuinness, governments step in in a co-ordinated way to set up a network of bad debt agencies playing a similar role to Ireland’s Nama.

IK: You mentioned the flows coming in and out beyond pure exports. And I think a lot of that is intellectual property, intercompany interest charges. The numbers on that are staggering – Airbnb alone last week injected $7 billion and that’s just a small piece of what’s been going on. Would you like to see more regulation of that sort of intercompany debt transactions? Is it something the Central Bank is actively monitoring?

GM: We’re trying to get a better handle on it. So, I think it would be a bit premature to say that we’d like more regulation. We want to get a better handle actually on what’s going on and we’re doing it in stages. So, firstly, what is the sort of interaction between those multinationals and the domestic banking system. And then there’s the interaction with the international banks in Europe and then the rest of the world. So, understanding that is something which we’ve started to work on. We haven’t arrived at conclusions yet. A lot of that is driven again by tax and the flows are driven by tax. And it’s driven also by the tax systems, this station between debt and equity. And I suspect that changes, if any are ever planned in that area, may affect the size of the flows. But obviously, one of the areas I’m particularly interested and this goes beyond multinationals and which I’ve talked about in the past is the whole area of non-banks. 

The financial flows in non-bank intermediaries is something which I am very interested in, but that goes beyond MNE activity. 

IK: Yeah, and I will come back to that, I want to touch upon that non-bank lending. But before I get there, I just want to close out on some of the outlook on the Covid piece. And I suppose in Ireland, one of the big areas that we’ve been looking at and trying to figure out what the future looks like is property, particularly around commercial property. I know you had a view on commercial property that it was a bit over-priced before the crisis. I’m just wondering what is your view on the property market now, and property risks?

“I think there’s a bigger question mark over retail than there is over office development.”

GM: I’m not sure I really talked about commercial property being over-priced. I mean I certainly thought residential property was over-priced when I looked, in particular, where Dublin stood in international comparisons. I think the outlook for commercial property, in the near term, is weak, I would have thought. Not least because – well, primarily because of the pandemic but also because of the uncertainty I suspect in retail – a topic we talked about a few minutes ago. In the retail sector, are we at the beginning of some structural change in terms of people’s shopping habits? 

People asked me this question a few months back, which is whether I thought remote working was going to have a big impact on office developments. And I think it’s too early to say actually. I think there’s a bigger question mark over retail than there is over office development. But the reality is that capital values and rentals have fallen. 

Residential is different because that has demand; we went into the pandemic with demand being pretty high and supply being constrained. Supply has been further constrained as a result of the pandemic and demand has not, on the face of it, dropped by as much as the increased constraint on supply. I know just from the experience of my own organisation, we’ve been working remotely now since March last year and I know quite a few people have given up their rentals and moved either back home somewhere in the country or just moved out of Dublin. At some point, you’d expect even those to come back into Dublin and I think, fundamentally, the underlying demand for housing and the supply constraint is going to keep residential property in a better position than commercial. 

The Central Bank of Ireland.

IK: In relation to non-performing loans, and I know it’s a topic that you touched upon in your speech at UL as well: How big a problem do you see it? But also, how do you think we can remedy it? We had this conversation ten years ago about how you deal with non-performing loans and the answer was overwhelmingly to sell them to international hedge funds or private equity or vulture funds. Are we likely to see that happen again or do you think there’s a better way of doing it? And I know for example Mairéad McGuinness has talked about establishing a Nama-style bad bank for debt coming out of this crisis. What’s your own view?

GM: My own view is that we shouldn’t close off any options to manage the country’s exposure to non-performing loans. I do think the private sector has absolutely got a role to play here. I suspect that the State has got a role to play here. Obviously, the financial system itself, I included them within the private sector, they’ve got a role to play. The asset management company idea, that may have a role to play if everything else sort of failed. I just think that the practical European legislative and political issues around setting something like that up and getting it to work has some issues. That it may be too hard or it may take too long to get it to work. Certainly, the sale of the NPLs is, I think it’s part of a menu of options. 

I’ll make the point in the speech that the legacy issues, I think, really do need to be resolved. They’re obviously a problem for the individuals and they’re a problem for the system. And I think they’re a problem for the country. Having those around is having negative effects on – I can’t show you evidence on this, but I think it’s having a negative effect on people’s perceptions on whether this is a market they want to enter. I can’t remember if you asked me this question or someone was talking to me recently about competition in banking. Well, I think competition is a good thing. But you need to make it attractive for people to commit and I suspect that the legacy issues are just not helpful in that. I mean they’re obviously not determinative but, as a country, we should not restrict ourselves to the possible solutions. So, sales; I noticed this week or last week reading about, I suspect, AIB deciding to call their sales ethical. Sales will have a role to play. Actually, mortgage-to-let may have a bigger role to play. I’m just a believer in as many ideas as possible ultimately to resolve this problem. 

“Landlords need to be thinking about this, it shouldn’t just be up to banks to offer forbearance.”

IK:  But I think another issue that’s emerging now, particularly out of this crisis, is in relation to business debt. There’s not as much forbearance in relation to it and I know the banks were working under your guidance with an awful lot of businesses to try and work something out. So, on one side you’ve got their debts. But on the other side, there is an avalanche of cases going through the High Court at the moment between landlords and commercial tenants. That’s another worrying area that isn’t really on the agenda at the moment but will be in some time. 

GM: Yeah, and I think landlords need to be thinking about this, it shouldn’t just be up to banks to offer forbearance. Landlords need to be thinking about their medium to long-term interests too. And I suspect they are actually, notwithstanding what you just said about litigation.

IK: Just in relation to banking and you touched upon the point there about interest rates being a barrier to new entrants. The issues around competition will get worse if Ulster Bank leaves. How does Ireland, and the Central Bank in particular, how does it encourage more entrants to come into the market?

GM: Well, the Central Bank in particular, to use your words Ian, has no mandate around promoting competition, unlike other Central Banks in other parts of the world. So, our job really is to make sure that the financial system here is seen as an incredibly well-regulated one. That it’s fair to both consumers, customers, but also to the institutions that work within it, the financial service providers themselves, by being the best at what we can do. And I’d hoped that people, organisations would find it attractive or at the very least not negative to come here. But otherwise, the sorts of issues you raised really aren’t ultimately for us. I mean our job is just to make sure the system is well regulated, financial stability is maintained and it works in the interests of consumers of the wider economy. 

IK: Yes. but there is a consumer element to the Central Bank’s role and you’ve highlighted that in your speech. I mean, would the Central Bank like more banks to regulate in the market?

GM: I think we would. I mean I would like us to have, to see more competition in the market. I mean, I think… In fact, just wearing my financial stability hat, never mind my consumer protection hat, just my financial stability hat, I don’t want to see concentration risk in the banking sector. I’m not saying that we’ve got unmanageable risk. I’m just saying that competition reduces that sort of risk. So, having more offerings for consumers in Ireland would be a positive thing. It may be well regulated. They’d need to have all the usual things that you’d expect. But more competition is better than less competition, absolutely. 

The Irish Banks

IK: One of the surprising aspects in relation to the banks is that they seem to have come through this particular crisis a lot better than many people, not yourself, but many observers would have expected – this points to the capital improvements that they’ve had over the last ten years. 

GM: It does and I think it confirms those as we indicated last year in both our financial stability reviews, the one in June and the more recent one at the end of November. Especially the one at the end of November because we did those forward-looking analyses which show that even under a severe scenario, not our baseline scenario, but a severe scenario, the financial system as a whole remained pretty resilient. So, that is absolutely an indicator. I think it’s an indicator of two things actually. One, that regulators have done a good job over the last decade. I don’t mean the Central Bank of Ireland, I mean globally, they’ve done a good job to address the weaknesses that we had in the run up to the previous crisis. But secondly, I think it also to a certain extent reflects on the banks themselves realising that they needed to respond in particular ways to the immediate crisis, which they did – the payment breaks, the mortgage arrears. Actually, all payment breaks were instigated by the banks themselves back in March, pretty early on. I said that as a small example, the recognition by them that actually, early action helps to sort of manage your own balance sheet. 

The third thing actually – this is worth saying this because it’s so obviously but we tend to forget it. Perhaps unusually, this is not a financial crisis, right? This is an economic crisis that’s been caused by a health crisis. So, that in itself is helpful. It is down to all the work that was done largely over the last ten years. And our big challenge now is we’ve drawn down the banks. I’ve put this in my speech: The banks have drawn down on the resilience that they’ve built up. The State has drawn down its resilience and the question now is how to we build that up and back.

But one of the consequences of the work that was done over the last ten years – globally, we spent a lot of time regulating banks and inevitably I don’t think it is necessarily surprisingly the size of the non-bank sector, certainly in Ireland, but I mean around the middle, has grown significantly. And I think this warrants focus now and it has, but it absolutely needs to turn to addressing the issue of non-banks. In fact, I’m pleased to say, I think we were one of the early people to be talking about this, but there’s now quite a bit on consensus internationally, the Financial Stability Board… I read an interview of the IMF managing director the other day making a similar point. So, I think that’s an area that, as well as rebuilding the resilience that has been drawn down upon.

The rise of non bank lenders

In October, the Central Bank published an 18-month review of 358 active fund management companies (FMCs) in the State. It made for grim reading. It found a “significant number” of firms authorised before the surge in Brexit applications do not meet the required standards, and a “large number” have not increased employee levels to meet the beefed-up requirements.

“The Central Bank’s expectation is that all FMCs should have a minimum of three FTE [full-time equivalents], each of whom should be suitably qualified and of appropriate seniority to fulfil the role. This number is of course a minimum expectation and only relevant to the smallest and simplest of entities,” it said. “Other firms will be expected to have a level and quality of resourcing determined by the nature, scale and complexity of its operations.”

The review also found shortcomings in how large overseas asset management companies selected people to be involved in the management of Irish-based fund management companies, and how these individuals carried out their duties. The bank has issued letters to the chairs of Irish-based FMCs, asking them to review specific shortcomings identified and take immediate action.

IK: Let’s talk about the non-bank sector. Coming out of the last crash there is a perception – and it is not an unwarranted one – that the non-bank sector was ready for Ireland but Ireland wasn’t ready for the non-bank sector. So, I’m talking of things in terms of the taxation structure and the regulatory structure. Presumably, it’s not just an Irish issue, though. If we are going to have a greater understanding and regulation of this sector it’s going to have to come on a multilateral basis. 

GM: Completely. And it’s beyond Europe, right, it’s a global issue which is why the Financial Stability Boards looks at this. Although we’re not members of the FSB, we have been invited to work on this particular issue. And you know, the FSB is working on behalf of the G20 on it. Absolutely, it’s a global issue. I mean it’s a classic issue that no one country can move without others also moving at the same time, I completely agree. 

IK: But we do have a very central role in it if you look at the number of funds in the IFSC, the Central Bank has been monitoring them. An awful lot of funds have come in and there is an opaque danger. Is there a worry about a reputational risk to Ireland?

GM: Well, there’s always that sort of risk but I think Ireland and the Central Bank is playing a pretty active role in looking to address it. Now if the international system for some reason decides not to, I don’t expect this to happen by the way, but if it decides not to do something about it, there’ll be absolutely no evidence anywhere that it was inaction on the part of the Central Bank of Ireland that’s led to that. We have a responsibility actually to play a role here. And in fact, the size of the sector, I mean perhaps unusually, the issues here are partly about the sector’s financial connections to the domestic economy. But they’re mainly about the sector’s connections to the global economy.

I feel a responsibility myself to work with, at the very least, my euro system colleagues but also colleagues outside the euro system to make sure this issue is looked at. That we do our bit and we work with others to ultimately minimise the risks for everybody because, you know, even if we’re not directly affected by something going wrong, we’d almost certainly be indirectly affected. The world is too interconnected and the financial flows are too good now for anybody to say, something like this is nothing to do with me. It’s absolutely something to do with us and I’m determined that we play a leadership role in addressing it. 

IK: On that point, there are two sides to this. It’s great when Ireland turns around and says we’ve a vibrant IFSC and we’ve a great financial sector. But there’s another side when you say Ireland has a very vibrant IFSC and an awful lot of it is, I don’t want to say brass-plate, but is opaque. I mean Stephen Kinsella has written extensively about the risks of shadow banking in this country. But you think we can get on top of it?

GM: Oh, I certainly think that there is enough international consensus to address the issue. And so, I’m optimistic, I’m optimistic. And as I said, it was only the other day, Kristalina Georgieva, the IMF’s MD, was talking about this issue. There’s enough consensus and there’s enough will to address this. And incidentally, I know Stephen has written and, actually, they’re good articles, about shadow banking. But the use of the word shadow gives the impression sometimes that this is somehow illegal. Actually, the key point here is that it’s not illegal but these are vehicles that the world has allowed to grow and develop and that play useful roles in the global economy, undoubtedly. They play a useful role. So, it’s not a question of stopping the activity. It’s a question of making sure it’s well regulated and that we understand the interconnections, we understand any systemic risks that they have and we manage them and deal with them appropriately. 

IK: But is it not also a question of making sure that those structures are used for their intended purposes? Within this context, I’m thinking specifically around Section 110 Vehicles, which were established for securitisations and were used for a whole lot of other things.

GM: I’m very sympathetic to that. I mean ultimately, you know, it’s up to… My focus is on making sure that the system is stable and that the policy reasons underlying why they exist and what they do and what they don’t do and what they shouldn’t do. I mean those are issues that also need to be thought about. I’m sympathetic to that.

Holding insurance companies to account

If the banks were the villains ten years ago, much of the focus has since turned to insurance companies. Indeed, a central theme of Gabriel Makhlouf’s tenure as governor has been a constant battle with insurance companies over a range of issues including Covid business interruption cover and price differentials. 

In relation to price differentials, the regulator said in a report in December that the technique is leading to customers with similar risk and cost of service profiles paying different premiums for reasons other than risk and cost of service. The bank’s interim report on the practice of differential pricing also found that dual pricing – where new and renewing customers are charged different premiums for reasons other than risk and cost of service – is evident across the private car and home insurance markets. The study also concluded that there are significant differences between what different groups of customers pay relative to their expected cost, with the most loyal paying the most.

Meanwhile, the bank is reportedly not impressed with FBD’s hard-line stance not to pay out on business interruption cover as a result of Covid-19. A test case is currently before the courts, but unlike a similar case in the UK, is it is being taken by a selection of publicans and not the regulator. 

IK: If you look at the number of reports that you put out, the underlying themes that seem to emerge from your governorship so far has been insurance and dealing with insurance companies. You have to look at their solvency and all of that, but there’s the consumer part and the consumer focus and it has been a bit of a bugbear for you to date. Would I be right in that assessment?

“The companies involved need to think very carefully about what they’re doing and how they’re behaving.”

GM: Well, yes Ian. I mean the bugbear might be a bit strong but it’s interesting just going back to what we were saying earlier that the contrast between the way the banks have dealt with their customers and the way the insurance… And I’m being unfair portraying this as if it’s every single insurance company. But certainly, the industry’s reputation – I think people would be a bit surprised at the hammering it’s had over the last year. So, you know, I suppose it’s my luck that I’m facing this issue now as I’m the governor. 

There are two particular things here, I think, leaving aside solvency-type issues. One is the question of business interruption insurance. Ultimately, the courts are going to have a big say in how this is resolved. We’re pretty clear ourselves having done a lot of work and having studied the policies that are out there, and you may have heard me talk about this before. There are some policies where there’s no cover at all. There are other policies where there clearly is cover. And then there are a bunch of policies in the middle where it’s sort of ambiguous and argue the industry should actually fall on the side of the consumer. And that appears to be, we’re still studying their judgement, that appears to be where the UK Courts have got to with their decision. The companies involved need to think very carefully about what they’re doing and how they’re behaving. 

FBD office in Dublin. Photo: Thomas Hubert

The other issue has had a big political profile. I decided that we would review price differentiation pretty early on in my governorship because I thought there were real questions here and we needed to study and understand and ask ourselves whether this practice was consistent with the consumer code. Because it is a practice that goes beyond the insurance industry. I think it is something that we are going to have to grapple with as a society as we understand how our data is used in everyday life and in commercial transactions. I did want this to be studied very carefully because I know a lot of the commentary I’ve read in the media sort of argues that this is automatically a bad thing. But I think there might be a conclusion that we should be careful to arrive at too quickly. We should do the research, do the analysis, make sure we understand what that issue is telling us, what the facts are telling us. I know of consumers who feel they benefit from price differentiation. We will come to a view this year as to what the answer is. But I think that particular issue and price differentiation is probably more complex. The insurance industry is at the forefront and I suspect it’s a more complicated issue that has wider ramifications. 

IK: Yeah, and just in relation to the first point you made there about business interruption insurance, obviously there’s a big test case going on. I don’t want to predetermine an outcome of that and the High Court is due to give its verdict on February 5. In Britain, we saw the FCA take the case on behalf of the industry. Was there a temptation for the Central Bank to do such thing or why did it choose not to?

GM: Well, partly because our mandate is slightly different to the FCA’s, partly because the Irish legal system is different from the UK’s. But that’s at the heart of the decision. One shouldn’t take that the way we approached this is we were not interested in it and we haven’t invested time, effort in it. But we’ve just done it in a different way to what the FCA did, that’s all. 

IK: And what has been that different, has it been forcing the hands of the insurers behind the scenes?

GM: Well, it has been a combination of… No, it’s been pressing the insurers to do what we think is right, giving them clear guidance and I mean that’s been the main differentiator. Obviously, the claimants decided pretty early on to take it to the courts and we’ve been paying close attention to that.

The view in Frankfurt

The Central Bank of Ireland is a constituent part of the European Central Bank (ECB), which is based in Frankfurt. Where the Central Bank of Ireland focuses itself mostly with regulating Ireland’s financial institutions, the ECB’s big job is setting monetary policy for the eurozone – that is, making sure the supply of and demand for euros is where it should be. This it does by changing short-term interest rates, printing money, and telling the markets what its future plans are, among other things.

Monetary policy is arcane stuff, but it’s critically important to ordinary people’s lives. If supply and demand for money aren’t where they should be, recessions, financial crises or inflation are the result. By comparison with other important central banks like the Fed, the Bank of England or the Bank of Japan, the ECB has been notably conservative in how it approaches its job. That is, it has up to now prioritised keeping inflation low over keeping unemployment low. 

Last year, under its new President Christine Lagarde, the ECB launched a review of how it conducts monetary policy. I began by asking Makhlouf about the ECB’s potential change of direction. 

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IK: Obviously, the ECB is reviewing its mandate with a view to adjusting inflation targets as they put it. Is it now too little too late at this point?

GM: No. Well, actually, firstly we’re not reviewing our mandate because our mandate is written in the treaty and our mandate says that our objective is to pursue price stability. And we have a secondary mandate which is that, without prejudice to price stability, we support the policies of the European Union. So, we’re not reviewing that. What we’re reviewing is how we deliver price stability. We are reviewing our strategy and we haven’t actually looked at our strategy since 2003. The first review in 17 years is definitely overdue. It’s not too late by any stretch of the imagination. It’s very timely and my own personal view is that the next review should be in five years because I also think that monetary policy is something that ultimately is about the real world out there. And we should be reviewing our strategy on a regular basis to understand how the world is developing and to understand what it means for what we’re doing. In my view doing it more regularly also reduces the sort of drama around it. But is it too late? I know what you mean by is it too late…

IK: What I mean, governor, is could you generate higher inflation now even if you wanted to?

GM: Well, it depends, higher than what? I think the actions we are taking, have taken, are playing a role in price stability and that may be taking longer than we would want to have the sort of impact that we would want to have. But that’s not to say that the actions haven’t been working. So, and I mean personally, I think they have been working. But there’s an interesting set of questions which we do need to understand and it’s not just us in Europe. Advanced economies in particular need to understand what is happening to what we call the natural rate of interest and have we moved into a world where interest rates are just going to be low and inflation is going to be low. You’re probably too young to remember the ‘70s Ian, but the sort of numbers I see now were unimaginable back in those days. But I don’t think that because inflation is low Central Banks are powerless and the ECB can’t do its job. I don’t think that’s the case. And I certainly think that we need to do a much better job at explaining to the citizens of Europe what it is that we’re doing and why we’re doing it. Which I don’t think we’re particularly good at doing.

Gabriel Makhlouf on crypto currencies

“I was asked the question about bitcoin the other day and I gave them a one-word answer which was tulips. And look, I don’t know why people invest in cryptocurrencies. From our perspective, I don’t think they’re going to be a replacement for a currency. I mean, there obviously are some people that think they’re a good investment and they’ll generate a return. From our perspective, the important thing is to make sure that consumers are protected, that they understand the product they’re buying. I mean similarly, related but different, we do have concerns about making sure that anti-money laundering rules operate effectively in this area. But you know, as an investment product, its price will go up and its price will go down. I saw the FCA the other day said that if you invest in bitcoin you should be prepared, maybe they didn’t say bitcoin, maybe they said cryptocurrencies I can’t remember. But they basically said you should be prepared to lose all of your money. So, our focus, our focus is on making sure consumers are protected.”


The interview is drawing to a close. Throughout, the governor has been open and has never shied away from an answer. He is admittedly diplomatic, but so too are most members of the ECB governing council. However, I am keen to go beyond monetary policy, and ask him about his transition to the new role in Ireland, and what has struck him about the country since his arrival.

Her response is insightful: “Probably the sheer breath of our mandate was something which I had read about obviously, but it was only joining the bank and you fully appreciate the sheer breadth of what we’re responsible for. From going to the Governing Council, the ECB and deliberating on monetary policy decisions for the euro area as a whole through to making sure that Irish banks have the right amount of capital, they need to sort of do the business, right through to making sure that moneylender regulations are fit for purpose. The sheer breadth of what we do, you only fully appreciate it when you join. 

“In New Zealand where I came from, what we do was done in two organisations. In Australia, it’s done in three organisations. For the size of the country and the economy we have, I think our model is probably the right model, and that surprised me. This is definitely not a Central Bank thing but more a comparison, compare and contrast of Ireland and New Zealand. I mean both countries have roughly the same number of people. Both countries have a big reliance on agriculture. But actually, not as big a reliance as people think they have, you know. Agriculture’s got a fantastic power to just feel much more significant than the numbers actually say.

Obviously, both countries have got a legacy of different sorts with the British – but big differences, so those are the sort of similarities. The single biggest difference is Ireland’s proximity to its markets. In New Zealand, we used to spend a lot of time talking about the tyranny of distance. The fact that, apart from Australia, anywhere else is like a 12-hour flight, roughly. Whereas Ireland is part of a huge Single Market and a natural gateway, as we were discussing earlier, for a lot of multinationals from the United States into the market. That proximity of market is quite a significant advantage Ireland has, which is an interesting difference.

The other thing that was a surprise and again, it’s nothing to do with the Central Bank really – and it’s not even anything particularly to do with Ireland, but it’s really coming back to Europe. I was surprised and I suppose to a certain extent I’m still surprised at how little time we spend talking about understanding what’s happening in Asia.”