ECB’s Centeno: Cannot Start Easing Only When Inflation Hits 2%

26 April 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member Mário Centeno on Friday said that the ECB’s projections already showed inflation fluctuating around 2% in 2024 and that the Governing Council shouldn’t wait until the price stability target was met to start dialling back monetary restrictiveness.

During a panel discussion at conference on monetary policy transmission at the ECB, Centeno, who heads the Banco de Portugal, said, ‘The inflation in our projection, in 2024, will be below 2% already in the summer, then it will fluctuate around 2[%] before stabilising slightly below 2%. This is what we have in our forecast, and we cannot start breaking and easing financial tightening when we are at 2[%], because there’s a huge mass of impact that will follow still.’

Landing inflation at 2% without creating a recession or undershooting on the monetary policy response was not easy, he said, adding that ECB needed ‘by all means, not to undershoot.’

Monetary policy transmission worked with a lag and the system would still be operating with some degree of tightness when the 2% mark was reached, he said, which was a risk to the European economy in the context of weak growth and weak investment.

‘And I don’t see how, if we don’t somehow adapt the policy trajectory to it, we will deliver’, he said.

The ECB’s forecast based the economic recovery on consumption, which was directly impacted by real wages and one of the reasons why labour market developments were so important, he said.

Monetary policy needed to be able to preserve the maintain the progress made by the labour market, he said, ‘because it is with the labour market that we have to share part of the success that Europe had fighting inflation, and we need to design our policies to preserve this success.’