ECB’s Centeno: Don’t Need High Real Interest Rates to Get Inflation Back to Target

26 September 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Mario Centeno on Monday argued again 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 seminar in Rome and provided by Banco de Portugal, which he heads, Centeno, echoing standard ECB messaging, said that inflation expectations were generally at 2%, but that some indicators needed close watching.

Whether inflation could be controlled with such low real interest rates was the ‘critical question’, he said. Still-negative real interest rates even next year could induce more inflation by encouraging the frontloading of consumption and investment, he said.

However, ‘this policy of gradual normalisation may be consistent with inflation converging to target’, he affirmed. The general expectation of medium-term inflation at 2% ‘amounts to say that monetary policy is credible and that high real interest rates are not seen as necessary to counter inflation’, he said.

‘In other words, the effects of the unprecedented supply shocks will dissipate without imprinting higher inflation expectations’, he continued. ‘The contrafactual would be a clear tightening, or even a too abrupt normalisation.’

This could interfere with transmission and impair the real economy, he said.

‘A scenario of going back and forth in the decisions would undermine the credibility of monetary policy’, he said, reiterating comments made by him at least twice previously in recent weeks. ‘Monetary policy must remain predictable and act at the margin in as small steps as possible.’

In other comments, Centeno suggested that the time was right to ‘take advantage of the slowdown of China and by-pass strategic supply chain dependencies.’

‘China’s development model seems exhausted’, he said. ‘The lack of freedom, both political and economic, is not compatible with a long-run model of sustained economic growth. Growth requires capacity to revert decisions to innovate and, therefore, freedom of thought.’

Recent supply constraints are in part due to China’s ‘zero-Covid policy, a centralized decision, in a highly integrated decentralized market economy’, he said.