ECB’s Centeno: Monetary Policy Inaction Would Be Economically Costlier Than Higher Interest Rates
16 November 2022
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Mario Centeno on Wednesday repeated the warning that the economic cost of monetary policy inaction in the face of high inflation would be greater than the cost associated with higher interest rates.
In a speech published on the website of Banco de Portugal, which he heads, Centeno said that if high inflation were persistent, the consequences would include ‘uncertainty, loss of confidence among economic agents and an inevitable recession.’
‘Therefore, inaction is not an option’, he said, noting the ‘very clear’ objective of the ECB.
‘The effects of monetary policy tend to be lagged in time, but I am sure that in the medium term the objective will be achieved’, he said. Otherwise, ‘the behavior of economic agents will induce a recession and inflation will eliminate the significant gains in wages, employment and savings in recent years.’
He reiterated his warning that inaction ‘would have a recessionary cost greater than that which an increase in interest rates could cause.’
Along with prolonged elevated inflation, the sudden rise in borrowing costs and the pronounced economic deceleration were the main risks confronting the banking system, he said.
‘In the short and medium term, structurally higher interest rates should have a favourable effect on net interest income’, he said. ‘They will encourage greater diversification of the public debt portfolio, but may also result in the devaluation of the asset portfolio.’
Higher financing costs in an environment of economic pessimism could depress credit demand and impair debtors’ capacity to repay, he said.
‘However, an abrupt increase in the materialization of credit risk is not expected to jeopardize the stability of the financial system’, he said.