ECB’s Centeno: Must Adapt Forward Guidance to New Strategy or Lose Credibility

13 July 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank needs to bring its forward guidance into line with its new monetary policy strategy, ECB Governing Council member Mario Centeno said Tuesday.

In an interview with Reuters, Centeno, who heads the Bank of Portugal, said the ECB’s revised forward guidance should emphasise the ‘room to manoeuvre’ its new monetary policy strategy gives it.

‘When we are reviewing the strategy, broadening the leeway of the allowable inflation trajectories, it is very important that the forward guidance is adapted to this new framework, otherwise it would lose credibility’, he said.

"[T]here is no overshooting logic or average inflation rate" in the new strategy, he was quoted as saying.

The symmetry of the new target means that ‘positive or negative deviations are equally undesirable’ and provides ‘greater room for manoeuvre than before’, he said. However, he noted, it ‘admits a temporary and moderate inflation values above 2% ... We must be patient and tolerant with deviations that we would not tolerate previously.’

Too-low inflation should result in ‘forceful and persistent’ policy measures, he said in reference to a key point of the new strategy framework.

The strategic review did not change the ECB’s mandate, ‘in which the priority is price stability’, he said. ‘It isn't a dual mandate like that of the U.S. Federal Reserve - growth and price stability.’

Currently elevated euro area inflation rates are due chiefly to ‘eminently temporary’ causes, he said. ‘It is expected that these factors, which will temporarily raise inflation in 2021, will not last and so our forecast for 2023 is 1.4%, significantly below 2%’, he said.

Centeno expressed optimism about the recovery’s fundamental sustainability in the medium term, but said there was ‘enormous uncertainty about the evolution in the short term’. The ECB should withdraw support cautiously in view of the potential for insolvencies and unemployment to increase, he said.

As for the ECB’s pandemic emergency purchase programme, ‘[t]he decision has not been made when to move from reinvestment to divestment’, he said. The asset purchase programme would continue, he indicated.