ECB’s Centeno: New Strategy Won’t Immediately Change Monetary Policy Stance

14 July 2021

By David Barwick – FRANKFURT (Econostream) – The new monetary policy strategy of the European Central Bank will not instantly bring about a change in the policy stance, Governing Council member Mario Centeno said Wednesday.

In an interview with Politico, Centeno, who heads the Bank of Portugal, was asked whether the modification of the strategy implied an immediate change to monetary policy. ‘No’, he replied. ‘With the data we have today, it is possible and to be expected, and this is what the markets anticipate, that monetary policy will follow its course, with no changes resulting only from this revision of the strategy.’

However, it should ‘have consequences for anchoring medium-term inflation expectations’, he added. ‘Our expectation is that it will, because clearly this has not happened in recent years, regardless of the assessment, which is very positive, of the role that the ECB played in containing the negative effects of the different crises.’

The 2020 HICP projection of 1.4% ‘was obtained with a monetary policy strategy that has now ceased to exist’, he said. The inflation target has now been increased and ‘there is a very big difference in the way in which positive and negative deviations were considered’, he said, whereas under the old strategy, ‘upward deviations were not allowed.’

As to why the strategy review did not yield an outcome allowing the ECB more flexibility in terms of debt issuer limits and deviations from the capital key, Centeno said the new strategy embraced previously nonstandard tools and did not need to go beyond that.

‘The debate on concrete instruments has been taking place throughout their implementation and will now take an important step in the coming weeks, because we are going to debate the concept of forward guidance, the role of the existing asset purchase program and the pandemic-related emergency purchase program – PEPP’, he said.

There is ‘no withdrawal of stimulus’ between the currently scheduled March 2022 end of the PEPP and the end of the reinvestment period, slated to continue until end-2023 at least, he said.

‘The concept of flexibility proved to be very important in the initial phase of the PEPP, but it must be said that the program was such a significant success, with stabilization of markets, that flexibility was not used actively afterwards’, he argued. ‘There has been a normalization of purchases to a situation similar to that which would have occurred if there were no flexibility. Often, the existence of the instruments, and in this case this flexibility, is enough to produce the desired effects.’

As for the end of asset purchases, ‘there is a great sense of responsibility and concern about this moment’, he said. ‘It will be analyzed very carefully and in the light of a wide range of information, which includes the success of flexibility.’

Portugal remains substantially more indebted compared to other euro area member countries, which ‘makes us more sensitive to interest rate fluctuations’, Centeno conceded. ‘This strategy review takes a very significant step forward in the ECB's ability to maintain accommodative monetary policies in periods of rising inflation above 2%, provided it is temporary and moderate.’

‘From this point of view, I believe this is good news for Portugal's need to have a continued transition period of convergence of these indicators with the Eurozone’, he continued. Portugal must return to a fiscal path that will put it more in line with its fellow member states ‘as soon as the evolution of the pandemic allows it.’

‘The decisions taken in Europe last year and which continue to be taken this year, and I clearly include monetary policy here, have come to give time for this process to materialize’, he said.

The Governing Council did not want a dual mandate, he said, ‘but we showed how, by being innovative in the measures we adopt, we can accommodate, without prejudice to the primary role of controlling inflation, other principles.’

With respect to the final outcome of the strategy review, ‘[t]he decision was unanimous, but of course this unanimity does not reflect the position of each individual, but the consensus that was created’, he said.