Exclusive: ECB’s Centeno: ‘Don't Think We Have to Wait Until May to Make Decisions’

9 January 2024

By Isabel Teles – FRANKFURT (Econostream) – The European Central Bank won’t have to wait until May in order to make coming policy decisions, according to ECB Governing Council member Mário Centeno.

Centeno, who heads Banco de Portugal, emphasised in an interview with Econostream on Friday (transcript here) that the ECB would be able to initiate monetary policy easing sooner than had been thought until recently, even as he declined to attach an exact date to this, noting the ECB’s data dependence.

‘I don't think we have to wait until May to make decisions’, he said with reference to the desire of some policymakers to stand pat until wage data become available well into 2024.

Barring the unexpected, the ECB had beyond any reasonable doubt reached its terminal rate, he affirmed. Though it could not be said precisely when an initial rate cut would occur, Centeno said he could ‘make a slightly more qualitative analysis and say that the most recent developments on inflation and the economy have obviously brought the moment of easing closer to us.’

Over the next quarter, developments should continue to show inflation converging to the ECB’s medium-term objective of 2%, he said.

‘The decision to keep nominal rates steady for the moment is appropriate and we will decide when to cut them sooner than we thought until recently’, he said.

December euro area HICP of 2.9%, though an increase from the previous month, was nevertheless lower than had been expected and thus ‘good news’ that fit into the narrative of looser monetary policy becoming possible sooner than had been anticipated not long ago, he said.

Centeno rejected the argument that wage developments over the course of the first half of the year obliged the ECB to remain on hold that long. There was no indication ‘that second-round effects on wages have materialised or will materialise or that wages will put additional pressure on prices’, he argued. Indeed, the ‘pressure variable for inflation is not wages, but unit labour costs’, he said.

The decline of inflation had been more rapid than the previous increase, making elevated inflation 'a more temporary phenomenon than many believed a few months ago', he reasoned. 'And this has been true for both headline and core inflation indicators', he added.

Moreover, the passing nature of previously high inflation implied that it would not induce systematically higher future price growth, he argued.

‘This means that the latest inflation figures tell us two things: one is that the reduction of inflation will happen sooner than what we thought six months ago, and the other is that the easing process will also be faster than what we thought six months ago’, he said.

Last month’s decision by the Governing Council to halve reinvestments under the Pandemic Emergency Purchase Programme (PEPP) from mid-2024 and then cease these entirely at the end of the year ‘was both taken and received quite smoothly’, according to Centeno.

‘We assessed that there would be no consequences on the markets of an announcement of a partial reduction in reinvestments starting in June next year’, he elaborated. ‘It does not interfere with the important decisions that we have to continue taking in terms of interest rates, but it allows the normalisation of the balance sheet – just like we did for the normalisation of interest rates.’