ECB’s Centeno: Financial Market Tensions Have To Have an Impact on Our Decisions

27 March 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Mario Centeno on Monday said that the financial market tensions would inevitably have an effect on the ECB’s monetary policy.

Asked at an OMFIF event whether the recent turmoil might put an end to the ECB’s hiking cycle, Centeno, who heads Banco de Portugal, said, ‘Well, if it’s over or not, we have to see with the data coming in the next few days and then until May, because I am very keen on this tightening based on data and meeting by meeting. I don’t have to decide tomorrow, so I can really wait until early May to see what the numbers tells us.’

‘But it’s almost a tautology to say that with these problems … affecting the euro area … they have to have an impact on our decisions’, he continued. ‘If I don’t take this seriously, I will not be dealing with all the information I have available to me. That doesn’t mean that I see … an externality being materialised today in the euro area. We need to continue, as I mentioned, monitoring all current financial market tensions to understand where that can take us. But I really want us to take all information available on board.’

The ultimate decision in May ‘will depend on the data, but we need to be very clear that we want to preserve the stability that Europe was able to instil in the world this time around’, he said.

As to whether there was a growing sense of a need for caution on the Council, Centeno noted that he had personally been ‘always on the side of the cautious people.’

‘I think we have to minimise the biggest loss’, he said. ‘I will not count people like that, but things are evolving. I mean, financial stability and the functioning of the monetary policy transmission mechanism is at the core of our mandate. We made it very clear in July 2021.’

‘Now that we see some uncertainty building around these dimensions, it’s all natural that we take that very high in our agenda’, he said.

Monetary policy transmission is working, he said. ‘We cannot fool ourselves by saying, “Well, nothing is happening, so this is not working.” No. The tightening is there. We know that it will be there for quite a bit of time. Tightening does not stop when the interest rate stops hiking, because as long as we have an interest rate that is above the neutral rate, we will be tightening.’

Asked whether he was worried about the stability of the euro area banking system, Centeno replied, ‘I think monitoring is the buzzword. It’s of the essence. Of course, I will feel relieved if markets behave as they are behaving today. … But the truth is that the ECB is closely monitoring the current financial market tensions.’

The system was resilient, had plentiful capital and was backed by the ECB’s willingness to do whatever was required, he said.

‘We don’t see anything systemic right now’, he added.

Monetary policy should be set patiently, he urged. ‘We do know that monetary policy takes time to be effective, there’s a time lag’, he said. ‘So, we need to be patient.’

Given that by far most Europeans with loans have fixed rates, the impact of monetary policy on the economy will take time, he said, ‘and we need to accommodate for that.’

‘I honestly don’t see - and I haven’t seen it yet during all this process - a de-anchoring of inflation expectations in the long term’, he continued. ‘The most nervous inflation expectations are from consumers, and we got very good numbers early this year for consumers’ expectations on inflation three years ahead. … I think the credibility and the determination of the ECB to fight inflation, people cannot take that lightly, because we really take it very seriously.’

Moreover, he said, second-round effects weren’t visible. ‘We don’t see signs of second-round effects on wages setting in the euro area as of today’, he said. ‘We of course have higher wage increases than before … but that’s absolutely an inevitability, given the inflation we have. But we don’t have wages going after inflation.’

To the observation that at the current pace of quantitative tightening the ECB would need decades to reduce its balance sheet to zero, Centeno replied, ‘I don’t think anyone has a view that zero is an optimum point to stop. We need to also evaluate on our way what is the optimal size of the balance sheet, because my intuition is that zero is not the number.’

QT was necessary, he affirmed. ‘When we reassess the pace, it is important to ensure that it remains consistent with the monetary policy stance. We don’t want this to interfere in the monetary policy stance, because our main focus right now is to control inflation and to bring it down to 2%. We need to preserve market functioning and maintaining control over short-term money market conditions in this context … So, this is my conclusion, we need to stay vigilant and continuously monitor…’

Centeno disputed that even those Council members who would like to pick up the pace of QT were willing to risk financial stability. ‘I don’t see any discussion in the Governing Council that is not even close to put at risk or to jeopardise financial stability in Europe.’

‘What I think is fair to say right now is that we will continue reducing the balance sheet’, he said.