TRANSCRIPT: Interview with European Central Bank Governing Council member Mario Centeno dated 29 November 2022
30 November 2022
Q: You recently urged on several occasions that monetary policy “act at the margin in as small steps as possible”. How concerned are you by the fact that monetary policy is not doing this? Are we now at the point where the ECB can start to set policy in a manner more consistent with this, and stop taking giant-size steps?
Q: After so much hawkishness has characterised recent Governing Council decisions, even including upside surprises such as in July, could you countenance a dovish surprise in the near future, or would this remain too risky under the circumstances?
Q: If the October 27 decision was not a case of frontloading and the ECB can instead speak of having “made substantial progress in withdrawing monetary policy accommodation” , can this change in communication be interpreted as a dovish signal?
A: Over the last months, the Governing Council has proceeded with a monetary policy normalisation process consistent with the return of inflation to target over the medium term. At the beginning of this process, we were clearly far away from ‘normal’ levels of interest rates. Since several steps have already been taken, it is natural to consider that those ‘normal’ levels are drawing nearer. Still, this is no guarantee that further steps are dispensable. The decisions on potential further interest rates hikes and their size will be data dependent and as such made on a meeting-by-meeting basis. More than focusing on being hawkish or dovish in tone, we must understand that tightening is underway, that households and firms feel it, and that the ECB sent a clear signal on the substantial progress made towards interest rates compatible with price stability. Adding more predictability and the rationale to our decisions will be key, as much as seeing inflation converging to 2% in the medium term, as markets currently do.
Q: You warned as well about the potential for “a clear tightening, or even a too abrupt normalisation” to “unwarrantedly destabilise the transmission mechanism and the real economy, making it harder to achieve the inflation target beyond the short run and reducing economic activity.” How much danger do you now see of this occurring, especially given the clear slowdown of growth in recent weeks? How far away is the current policy stance from being restrictive?
A: The normalisation strategy must support the fulfilment of the ECB’s mandate. Avoiding disruptions in the transmission mechanism and its effectiveness is a pre-condition for achieving our price stability objective. Unwarranted effects on financial markets and on agents’ confidence ought to be avoided. So far, the process of monetary policy normalisation has proceeded smoothly, i.e. without any resurgence of fragmentation. This has certainly resulted from the overall normalisation of monetary policy, but also from the announcement in July of the TPI, which functions as a safety net for transmission that contributes to the singleness of monetary policy in the euro area.
My evaluation is that in Europe all sides of the economic policy spectrum have been working with a great success towards stabilising the economy. Unfortunately, we have not seen this elsewhere.
Even though there is considerable uncertainty around the estimation of the neutral level of policy rates, we are probably close to neutral levels. If going forward the Governing Council sees the need to take policy rates above neutral levels it will do so temporarily, as in the long run policy rates should return to neutral levels, those consistent with having inflation at target.
Q: Given all the substantial downward movements lately in the prices of many key commodities, would 50 basis points not have sufficed on October 27, or would you have been afraid of disappointing financial market expectations of 75 basis points?
Q: Would you wish to push back against the expectations of those who predict yet another 75 basis points in December?
A: When deciding on how to adjust the monetary policy instruments to achieve price stability, the Governing Council analyses a large set of information. This includes movements in commodity markets, financial markets expectations and many other pieces of information. In the last meeting, our analysis led us to a consensus around a 75bp rate, considered as appropriate. Regarding the decision in December, we need to wait for further information and for a new Macroeconomic Projection Exercise. But it is clear that 75bp is not a norm, and that our decisions cannot be compared, in size, with those of the Fed, as conditions differ substantially in both economies. The Governing Council retains discretion on its decisions. The set of information available for the ECB and for the market may be different and, even if equal, it can be incorporated differently. Therefore, a decision completely aligned with market expectations is not guaranteed. That is not our mandate.
Q: Without undermining the prerogative of the entire Council to make a different decision, what would your preference be for the timing and manner in which quantitative tightening takes place?
A: The ECB has several monetary policy instruments that it uses to ensure inflation is at target over the medium term. Currently, the main instrument in the normalisation process is the set of policy rates. The time will come to normalize our balance sheet, which could be complementary (perhaps also a substitute at some point) to interest rate policy. As mentioned by President Lagarde at the last press conference, the Governing Council will discuss the key principles to reduce the APP monetary portfolio in December. These should certainly guarantee that there is no resurgence of fragmentation and perhaps address the shortage of certain safe and liquid assets. When the time comes to start a much-needed reduction of our balance sheet, we need to be sure that we will be preserving financial stability, as a way to preserve the transmission mechanisms of our monetary policy.
Q: To what extent does the recalibration of TLTRO III reduce the balance sheet of the ECB and take pressure off you to be aggressive about quantitative tightening? How much potential do you see for banks’ early repayments and the resulting reduction in excess liquidity to boost the money market rate from the deposit rate towards the main refinancing rate?
A: The TLTRO III was an important credit easing measure to counter downside risks to price stability during the critical phase of the pandemic. The Governing Council decided to recalibrate the TLTRO III conditions and opened three additional windows during which banks may choose to pay back the funds if they so wish. As banks decide to repay TLTRO III funds, which will depend on each bank’s cost-benefit analysis and cannot be accurately anticipated, this will contribute to somewhat accelerate the reduction of the Eurosystem’s balance sheet size. In any case, the resulting reduction in excess liquidity would remain well above the level at which money market interest rates would be affected.
Q: To what extent was the TLTRO decision motivated by a desire to free up high-quality collateral, of which there is a bit of a shortage? Could this adequately address the shortage?
A: Banks decisions to repay funds will increase in some degree the pool of (unencumbered) collateral that will be available in the market. As the issue of scarcity of liquid and safe collateral is important because it influences the transmission of monetary policy. However, this has by no means a meaningful impact on the overall scarcity of safe collateral.
Q: Banks may be profiting now from unexpectedly advantageous conditions in the wake of the interest rate increases, but the looming economic weakening suggests that life may become more difficult for them. Does the decision to recalibrate TLTRO III take into sufficient account the difficulties for banks that lie ahead?
A: The Governing Council assesses the necessity, efficiency and proportionality of any potential measure. Regarding the TLTRO III recalibration, the Governing Council considered it was needed and appropriate from a monetary policy perspective, bearing in mind the impact of such measure on banks’ activity. Monetary policy considers its effects on the banking system, which play a critical role in the transmission mechanism, but it should not take into account the effects on the capitalisation of banks per se.
Q: Do you see a significant chance that the next ECB staff forecasts will show a return to 2% HICP in 2024 and/or 2025?
A: The September MPE projected inflation at 2.3% on average in 2024. Latest HICP releases have however surprised on the upside while, for example, gas and most commodity prices have decreased significantly. The range of European gas suppliers widened substantially over the past months, as predicted by economic theory, but the speed and breadth of this process was largely unanticipated. We need to consider all updated information to assess the impact on the projection for 2024 and for 2025. We had inflation anchored at 2% in the medium term most of the time in the last 12 months; this is reassuring of our capacity to deliver on our mandate.
Q: How worried are you that, as at least one of your colleagues as well as various bank analysts have predicted, the ECB will have to start cutting rates again at some point next year? Would you see a credibility problem if this indeed occurred?
A: The Governing Council decisions are meant to bring inflation to target over the medium term. A process of monetary policy normalisation has been initiated with that goal in mind. Going forward, the Governing Council will continue to decide if and when further hikes are needed. This implies taking interest rates to neutral levels, or, if needed, temporarily above neutral levels. It is very important to underline that any rate hikes above neutral levels are supposed to be temporary. That policy is consistent with inflation at target in the medium to long run. A permanently higher level of interest rates above neutral rates is only consistent with inflation above target over the long run! In any case, if the risks to price stability change and according to the information available at any time the ECB judges that cuts to the policy rates are needed to counter downside risks to price stability, that will be the course of action. This will be consistent with our mandate and as such no credibility issues would prevail.
Q: Do you think that Italian Prime Minister Georgia Meloni has a valid point when she criticises the ECB’s extreme hawkishness in the face of mounting economic weakness (even if of course you set policy independently)? Or do you just dismiss this as populism?
A: I will not comment on any specific remarks. The Governing Council discusses openly all available information, which includes developments in real economic activity, and an assessment of risks, with the purpose of taking the most appropriate monetary policy decisions to deliver price stability in the euro area. Our very clear medium-term orientation caters for the immediate economic and social costs that our actions may entail. The signs of an economic slowdown in the euro area, with an increased probability that a recession could occur, are certainly an important aspect to be taken into consideration, as are the welfare costs of (too) high inflation that underpin our mandate.
Q: How satisfied are you with how euro area peripheral countries have been able to deal so far with the higher borrowing costs? Do you think the relative calmness has been due mainly to the TPI, and do you think it will last, even if policy becomes downright restrictive?
Q: Some parts of the market are becoming very weak and less liquid than they have been for a very long time. Are you getting worried about this? Do you have concerns about pockets of stress, for example pension funds or insurance that have invested in private equity?
Q: Are financing conditions in the euro area still very accommodative?
A: Financial conditions in the euro area have tightened, against the background of the ongoing normalisation process. Financing conditions are no longer very accommodative. This process has proceeded smoothly without the resurgence of fragmentation. Our decision to create the TPI, a powerful safety net, is indeed important to prevent unwarranted fragmentation, i.e. fragmentation not justified by fundamentals but instead by crisis of confidence. Nevertheless, we remain very attentive to developments in financial markets and certainly stand ready to react and guarantee the proper transmission of monetary policy.
Q: How pessimistic are you about growth in the coming quarters? Do you feel the euro area is already in recession?
A: The indicators released recently have shown a slowdown in the euro area is indeed underway, against the background of the effects of the war in Ukraine, the impact from elevated inflation on agents’ purchasing power, and some tightening of financial conditions. In the third quarter, the euro area’s GDP growth slowed down from 0.8% to 0.2% quarter-on-quarter. It will likely decelerate further in the fourth quarter and in the beginning of 2023. Even though quantitative information for the fourth quarter is still scarce, soft indicators such as the PMI or businesses and consumers’ confidence have decreased significantly. The probability of a recession in the euro area has indeed increased.
Q: Although the Governing Council will naturally always be able to arrive at a decision, it is simply inevitable that over time, as the economic deterioration becomes more evident and borrowing costs increase, it will take a more heated debate to achieve a consensus. Are we now at some sort of “tipping point”, following which those on the Council with greater concerns about growth will no longer be as willing to go along with those strongly in favour of rate hikes, regardless of everything else? Do you worry at all about the days of relative unity coming to an end?
A: The discussions at the Governing Council meetings are always open and comprehensive. All opinions are debated, and all views are assessed. This allows the Council to reach a consensus on what are the appropriate policy actions at any given point in time, taking into account diverse perspectives. This has been the norm at the Governing Council meetings and will continue to be so.