ECB’s Centeno: High Real Interest Rates Are Not Seen as Necessary to Counter Inflation

15 September 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Mario Centeno on Thursday argued that the ECB’s monetary policy enjoyed sufficient credibility to make high real interest rates unnecessary to get inflation back down.

In remarks made at a conference in Lisbon and provided by Banco de Portugal, which he heads, Centeno called a ‘critical question for monetary policy right now … whether it is possible to tame inflation with real interest rates at such low levels.’

After all, he noted, 2023 HICP is envisioned remaining high, while nominal interest rates are low. This could lead economic agents to bring forward consumption and investment, causing more inflation, he said.

‘Hence, why are several central banks maintaining real interest rates in negative territory, instead of actively seeking a clear tightening, i.e., positive and possibly very high real interest rates?’ he asked rhetorically. ‘Can this policy be consistent with inflation going back to target?’

Still, gradual normalisation may be in line with a return to price stability, he said, and expectations of markets and experts corroborate this, suggesting that ‘monetary policy is credible and that high real interest rates are not seen as necessary to counter inflation.’

If the supply shocks won’t disanchor expectations, restrictive policy or just normalising too quickly ‘could unwarrantedly destabilize the transmission mechanism and the real economy, making it harder to achieve the inflation target beyond the short run and reducing economic activity’, he cautioned.

‘A scenario of going back and forth in the decisions would undermine the credibility of monetary policy’, he said, repeating a statement last made earlier this week. ‘Monetary policy must remain predictable and acting at the margin in as small steps as possible.’