ECB Insight: Comments by Centeno Underscore Obstacles to Large Rate Hikes Post-March
6 March 2023
By David Barwick – FRANKFURT (Econostream) – Past the habitual dovishness, other, at first glance less substantive comments published Monday in an interview with European Central Bank Governing Council member Mário Centeno may actually offer the more interesting insight into the challenge the ECB will face in maintaining the current pace of monetary tightening beyond March.
Asked by Italian daily La Stampa whether the plethora of public observations by Council members about the monetary policy outlook constituted a problem, the head of Banco de Portugal somewhat disingenuously suggested that readers could interpret his answer ‘as a criticism or not’.
‘There is a phrase of a very famous Argentine writer, Jorge Luis Borges, who says that "one must not speak if one cannot improve the silence"’, Centeno continued. ‘I think it's a great lesson. I don't know if Borges ever worked in a central bank. I don't think so. But he was probably much more aware of the duties of central bankers than some central bankers are today.’
The claim of ignorance of every detail of Borges’ professional trajectory is a nifty little rhetorical device that allows the speaker to set up a point relevant to any field of endeavour (under other circumstances, Centeno could have equally well claimed, ‘I don’t know if Borges was ever a professional sumo wrestler’, or ‘I don’t know if Borges ever worked as a nightclub bouncer’).
The idea that Borges ever worked in a central bank is not much more improbable than our above examples, so we think it clear that Centeno was merely winding up for the pitch. Those of his colleagues the ball was intended to hit will understand this readily enough, once recovered from the shock of his unusually candid broadside.
Certainly there is no shortage of candidate targets, given the frequency with which Governing Council members have been weighing in lately and their tendency to sound a lot more hawkish than the Portuguese governor about the future path of interest rates.
Centeno is by no means alone among Council members in noting somewhat critically the resulting cacophony. As we observed in a piece two weeks ago, Banque de France Governor François Villeroy de Galhau and Banca d’Italia Governor Ignazio Visco also took issue with what the former called a ‘“live” prediction contest’ (ironically, in the same speech, he also invoked Borges).
And only on Sunday, ECB President Christine Lagarde in another interview pointedly commented that ‘[m]any governors are making suggestions or predictions and giving their opinion and personal analysis. As President of the ECB I have to be focused on the decision-making, which needs to take into account the data.’
In the case of Centeno, we think his swipe is the latest indication of a trend that led us in this space on 31 January to write that ‘[w]ith the willingness of the doves to play along clearly fraying, March could bring the perhaps inevitable clash of wills.’
We don’t for a moment think there is any question about the 50bp hike intended for next week; even Centeno, given the opportunity, did not contest the near-inevitability of this outcome.
We do however think the growing opposition of Centeno and others makes it more likely that the ECB will have to retreat in March to the comparative safety of a truly data-dependent, meeting-by-meeting approach that allows it to avoid the unpleasantness of providing clear guidance for May behind which it will now be markedly more difficult to achieve consensus.
This implies a lower probability of any hint as clear as those of the last few months about what the subsequent monetary policy meeting will bring, though we do not exclude and indeed expect that the ECB will not make a secret of the fact that a hiking bias continues to dominate.
In effect, this perfectly defensible option will buy much-needed time for the ECB, six weeks during which core inflation – which Centeno was at pains to note that ‘that the ECB does not target’ – will have two more opportunities to weaken enough to make a deceleration in the pace of hiking to 25bp palatable to at least a few of the hawks who as of today, we think, would be inclined to continue tightening at 50bp a pop.