Exclusive: ECB Should Not Pre-Commit to July Hike, Centeno Says

28 June 2023

Exclusive: ECB Should Not Pre-Commit to July Hike, Centeno Says
- Centeno: ‘We better be careful about producing substantial statements about the future’
- Centeno: Announcing decisions ahead of time ‘goes against the strategy’
- Centeno: Governing Council ‘will speak in July’ about what to do
- Centeno: 2024 rate cut ‘compatible with a reduction of inflation to 2% in the medium term’
- Centeno: ECB staff projections ‘may be optimistic in terms of GDP’ and ‘pessimistic on inflation’
- Centeno: ‘How can I be stressed about a projection that says that in 2025 […] inflation is 2.2%?’
- Centeno: Baseline ECB scenario is ‘end to the inflationary process without […] major disruptions’
- Centeno: Pass-through from rate hikes ‘may come abruptly’
- Centeno: Eurozone labour market ‘much more fluid’

By Xavier D’Arcy – SINTRA, Portugal (Econostream) – European Central Bank Governing Council member Mário Centeno pushed back on Monday against pre-announcing a 25bp hike in July, saying that policymakers needed to be careful and remain data-dependent in the face of troubling economic indicators for the Eurozone.

In an interview (transcript here) with Econostream on the margins of the ECB Forum on Central Banking, Centeno, who heads the Bank of Portugal, said that the ECB’s latest projections were pessimistic on the inflation outlook, though they still showed a return to the target of 2% by 2025.

He sought to distance himself from recent comments from Governing Council members pushing for a further ECB hike in July, saying: ‘We better be careful about producing substantial statements about the future […] this goes against the strategy; if we are data dependent, why do we need to keep announcing decisions before time? I don't see one single reason for that.’

The Governing Council would ‘speak in July’ and take into account recent ‘worrisome data’ such as PMIs and the ifo Business Climate Index for Germany, along with the fact that ‘credit conditions have tightened quite significantly’ of late in the Eurozone.

The scenario included in June ECB staff macroeconomic projections ‘may be optimistic in terms of GDP and consequently pessimistic on inflation’, he said. ‘If the economy doesn't grow as much as expected, inflation will also reduce faster than expected.’

‘[M]y most likely scenario for now is - and I feel confident with it so far - the baseline scenario of the ECB staff; we may reach an end to the inflationary process without causing major disruptions to the economy’, he said. The current projection, showing inflation at 2.2% in 2025, was not a major concern, in his opinion: ‘[H]ow can I be stressed about a projection that says that in 2025, in two years’ time, inflation is 2.2%? I really don't get it.’

The ECB’s statement that inflation had been ‘high for too long’ needed clarification, he said: ‘It has been too high. The 'too long' part has to be put in context. The arithmetic of the inflation path is very simple. From the moment in which headline inflation exceeded 2% to its peak, it increased by 0.018 percentage points each day. Since the moment it has peaked in October 2022, it has come down at a faster pace, 0.021 percentage points per day.’

The fact that a rate cut in 2024 was fed into the June projections showed that such expectations were ‘compatible with a reduction of inflation to 2% in the medium term’, he said.

It was important for the ECB to be ‘as predictable as possible’ when it stopped tightening, he said: ‘If, after the summer, we are not able to be more predictable and if we keep playing this game of trying to announce something that we don't want to announce, this only creates noise and anxiety in people. Every time people see the decision-maker going on word games with future decisions, it creates anxiety.’

The Eurozone’s labour market looked ‘much more fluid’, he told Econostream. Whilst this meant that the euro area was currently experiencing increasing labour market tightness, it left open the possibility of a faster negative reaction in unemployment in the case of an economic downturn.

‘We are not yet probably at our most efficient position, but we are converging. But if the situation deteriorates, the change will also be very large; in more fluid labour markets incur larger swings’, he said.

The pass-through from rate hikes ‘may come abruptly’ because firms would ‘not implement “half” investment projects or families can pay only half of their mortgage instalments’, developments which could be ‘highly non-linear’, he said.

‘That's why we need to look at 18 months’ time and not today, the pass-through of 400bp increase in the interest rate will be huge’, he said, adding: ‘The European did not become insulated from financial tightening. It's not yet fully revealed. It’s working behind the scenes.’