Exclusive: ECB’s Centeno: Total Rate Cuts This Year Could Exceed 100BP

22 April 2024

By Isabel Teles – WASHINGTON (Econostream) – The European Central Bank could potentially reduce interest rates by more than 100bp in total before the end of the year, according to ECB Governing Council member Mário Centeno.

In an interview with Econostream on Wednesday (transcript here), Centeno, who heads the Banco de Portugal, observed that the ECB’s forecast model in March had assumed cumulative easing this year of 100bp, but that since then, inflation had come in lower than expected.

Asked whether this opened the door to cuts this year totalling more than 100bp, he replied: ‘Yes, potentially. It depends on the confirmation of this reality, because we will reach 2% faster than we expected to in March.’

Weak activity and downward revisions to inflation demanded that the Governing Council look at the data with ‘additional concern’, he said.

‘At the moment, we are very close to 2%, and in fact we even predict that in the coming months inflation, although initially only temporarily, will fall below 2%’, he said. ‘We cannot lower rates only when inflation reaches 2%.’

With the downside surprises in March, the next phase of this monetary policy cycle involving a reduction in the rates was clearer, he said.

There was currently a big risk in that the economic forecasts were based on what Centeno called the labour market dividend, a unique circumstance that allowed for a disinflation process without recession, he explained. 

For this reason, monetary policy needed to safeguard the labour market, he said, warning that delaying a change in the monetary policy stance might ultimately require more drastic steps.

‘Because if we wait too long, a deterioration of the situation in the labour market may lead us, perhaps, to talk about more aggressive rate reductions’, he said.

So as to anticipate potential difficulties, he would be favourable to ‘setting economic policy in general, and monetary policy in particular, gradually and at the margin’, he said.

The current inflation projections were already compatible with price stability, he said, and this should be taken into account when evaluating the ECB’s next steps.

‘We have inflation already reaching values ​​below 2% year-on-year in some months this year. We have, as of mid-2025, inflation consistently slightly below 2%’, he said. ‘In other words, inflation is currently at 2%, there is not much doubt about that.’

Asked about the appropriated level of flexibility for the ECB to reach price stability, he said that ‘an interest rate target at the end of this monetary policy process close to 2% is, at the moment, a good benchmark for that.’

‘Which means that even if we do one, two, three, four cuts of 25bps, we will always have an interest rate higher than the neutral rate, that is, we will still be in a region where there is financial tightness’, he elaborated.