ECB’s Centeno: Period of Low Interest Rates Should Be Followed by a Normalisation

9 February 2022

By David Barwick – FRANKFURT (Econostream) – The period of low borrowing costs should give way to a desirable process of normalisation, European Central Bank Governing Council member Mario Centeno said Wednesday.

In a speech for a conference, Centeno, who heads Banco de Portugal, also said however that inflation was ‘anchored’.

‘We are entering a new monetary policy cycle’, he said. ‘The period of generally low interest rates, some even negative, should be followed by a normalisation, a desirable process.’

‘At this stage, monetary policy should keep all flexibility and all options open’, he said. Monetary policy should not be tied to the actions of Russian dictator Vladimir Putin, he said: ‘The credibility of a monetary policy that responds to supply shocks and political tensions does not survive the first clash.’

As for inflation, Centeno noted that the core measure was noticeably tamer than headline HICP and had declined last month, and that 5-year swaps indicated inflation expectations of 1.8%.

‘We can say that for the first time in many years inflation is anchored’, he said. ‘Second-round effects on wages have not yet been felt, at least for the time being, even though the limited labour supply constitutes an upward risk for inflation. After the temporary effects and the resumption of labour mobility in Europe, we anticipate a drop in inflation, which should converge in 2024 to values compatible with the monetary policy objective.’

Centeno suggested that while ‘[a]nalysts are often worried at turning points in policy’, Portugal could handle tighter monetary conditions. He reminded in this context that Portuguese 10-year yields in 2017 were at 5%, representing a spread versus Germany of more than 400 basis points, whereas today the spread is only around 80 basis points.

Moreover, Portugal was near an excessive deficit then, while ‘the requirement today is clearly within our reach’, he said.