ECB’s Centeno: Should Expect Rate Cuts as Inflation Falls Sustainably

16 May 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member Mário Centeno on Thursday said that expectations of interest rate cuts were justified in view of disinflation towards the ECB's 2% target.

During a press conference after the release of the 2023 Banco de Portugal Board of Directors Report, Centeno, who heads that institution, said, ‘Everyone has an expectation, the market has an expectation, that the interest rate reduction cycle will start in June. The reading we have is that inflation in Europe is falling, it is in a sustained fall, all the indicators we have demonstrate exactly that.’

The ECB had been forecasting inflation to reach the 2% target in 2025 since 2022, he said, adding that it was appropriated to expect a reduction in interest rates as the ‘approximation of the inflation rate to 2% is material, it is real’.

The ECB’s reaction function was symmetrical to upward and downward deviations from the 2% inflation target, he said, and interest rates should be adjusted accordingly.

‘We should expect that, considering that the natural rate -- the one that is compatible with the 2% objective -- is clearly lower than the current level of interest rates, the trajectory will be descending for some time’, he said.

The Governing Council’s decisions would be made on a meeting-by-meeting and data-dependent approach, reiterated Centeno, who also expressed his preference for a gradual reduction of interest rates.

‘I would prefer it to be gradual, not sudden. And for it to be gradual and not sudden, it has to be continuous’, he said.