ECB’s Centeno: Not Acting Against Inflation Would Exact Higher Recessionary Cost Than Hiking Rates
9 November 2022
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Mario Centeno on Wednesday expressed the need to bring inflation under control as a means of limiting the toll on economic growth.
In a speech published on the website of Banco de Portugal, which he heads, Centeno warned that ‘[i]f prolonged this inflation scenario will bring uncertainty, loss of confidence of economic agents and an inevitable recession.’
Inflation, though initially supply-side in origin, ‘has spread to demand, although not yet in a generalised way’, he said. ‘The generalised, frequent and large-scale rise in prices has become the norm rather than the exception.’
Medium-term expectations remain anchored, but ‘it is urgent to act, collectively,’ to restore price stability ‘as soon as possible’, he said.
‘If we do not control inflation, the behaviour of economic agents will bring about recession’, he said, noting the 40% increase in the real minimum wage, presumably in Portugal, between 2015 and 2021.
‘This is why monetary policy has to act, is acting and will act’, he said. ‘Not acting would have a recessionary cost greater than that caused by the increase in interest rates.’
Centeno urged monitoring for second-round effects not only in terms of wages, but also with respect to profit margins. ‘One euro of wages paid above what is compatible with price stability causes a pressure on inflation equal to that of one euro more on corporate profit margins’, he said.