ECB’s Centeno Qualifies Earlier Warning of Cost of Policy Inaction, Comes out Against 75BP

24 November 2022

By David Barwick – FRANKFURT (Econostream) – Days after repeating his warning that the economic cost of monetary policy inaction in the face of high inflation would be greater than the cost of higher interest rates, European Central Bank Governing Council member Mario Centeno on Thursday suggested that neither does he want much policy action.

In an interview with Reuters, Centeno, who heads Banco de Portugal, said, ‘We are nearing rate levels that we consider compatible with price stability in the medium term, which means that the idea that 75-basis-point hikes are the norm cannot materialize.’

Last week, Centeno said in a speech that the consequences of persistently high inflation would include ‘uncertainty, loss of confidence among economic agents and an inevitable recession’, so that ‘inaction is not an option’, as this ‘would have a recessionary cost greater than that which an increase in interest rates could cause.’

Today, he modified that. ‘It's important to end this cycle of increases in a credible fashion, and more important than the number itself is to transmit this narrative to the public’, he was quoted in the interview as saying. ‘We are really efforting [sic] to transmit that predictability about the future and I expect the December meeting to be very clear on that.’

According to Reuters, the hiking options for December envisioned by Centeno were apparently limited to 25bp and 50bp, and he wouldn’t even go so far as to say that further hikes would be necessary in 2023.

Rather, he evidently saw inflation running out of steam in the current quarter and seemed ready to sound the all-clear with respect to second-round effects.

‘This is frankly positive and very different from what happened in the United States, where the labour market from this point of view is rather overheated’, he said in this respect.

Centeno avoided specifying the likely terminal rate of the ECB’s hiking cycle, suggesting instead that he expected ‘the December meeting to be very constructive and useful for the most correct identification of this ceiling’.

As for quantitative tightening, it would be a ‘slow, gradual’ process, but ‘there is no doubt that [the ECB’s balance sheet] has to be reduced’, he conceded.