Exclusive: Transcript: Interview with ECB Governing Council Member Mário Centeno on 15 June 2024

20 June 2024

By David Barwick – DUBROVNIK, Croatia (Econostream) – Following is the full transcript of the interview conducted by Econostream on 15 June 2024 with Mário Centeno, Governor of Banco de Portugal and member of the Governing Council of the European Central Bank.

Q: Governor, it seems that the ECB left itself no choice but to cut interest rates last week. And as a result, if we don't cut again in September at the latest, there's going to be some reputational damage because the cut will appear to have come too soon. Is this something that you're concerned about?

A: Well, honestly, I don't agree with that line of reasoning, because we held interest rates for nine months. Inflation came down quite significantly since the last hike in September, and the disinflation process was faster than expected. Moreover, it was already in our information set that inflation would accelerate in April and May, just because of base effects. Actually, the acceleration of inflation in May – by 0.2p overall, 0.4p in services - was already in our forecast in September. We nailed it. And in general, our forecasts have been more accurate for a while than we sometimes recognise. We are now more reactive to data, so more sensitive to differences of 0.1p or 0.2p. Most of the differences are small, they don't change the big picture. But we are data-dependent, and in this context, I don’t like pre-committing, essentially tying our hands. But if you consider all the information over this rather long period since September, then I think it was a natural decision to cut. Going forward, I emphasise two words that we used in the monetary policy statement: prudent – we must be prudent – and confidence – we must also show confidence in what we are doing. We have good reasons for both.

Q: Regarding prudence, if we get to September and the data are again kind of ambiguous the way they were last week, so there's no clear argument for cutting or not, what does prudence require?

A: There was a sound case for cutting rates in view of the progress that we made in disinflation. It should be noted that we got good news in terms of first quarter growth, which are really needed to support the labour market, consumption and the recovery of real wages. In fact, this is crucial for the materialisation of our forecast, because the recovery of the euro area economy in the forecast is sustained by consumption growth. But let me be clear about the next few months. Because of base effects, inflation will remain closer to 2.5% than to 2% in the next few months. In contrast, after the summer we expect inflation to be closer to 2% than to 2.5%. In September, the additional information available will include the three data points of June, July and August. And of course, we also have a meeting in July; even if we don’t have updated forecasts then, it’s still a monetary policy meeting. And our task in July and then in September will be to analyse thoroughly the available information to come to a decision.

Q: So, in September, it would make strong sense to look through the bumpiness of the intermediate months.

A: It's a bumpiness that is completely natural for an indicator that is backward-looking. Once you have a base effect in the inflation data, it inevitably persists for 11 months and then suddenly disappears. You cannot stay hostage to this bumpiness.

Q: Independent of whether the decision last week was good or not per se, do you see a problem with the fact that the ECB talked up a data-dependent, meeting-by-meeting approach on the one hand, but on the other hand consistently pointed to June as being the date of the first cut? There's a little bit of a contradiction there.

A: It's more difficult now to be data-dependent than it was when inflation was going up very clearly and we knew what we were supposed to do, meeting by meeting. But still, the principle is the same. I don't think it's appropriate to commit, for example, to not doing anything in July. We still have a few weeks of information coming before our July meeting. There's a lot of things going on in the world as we speak. Excluding specific actions beforehand is not consistent with our approach. So, let's leave all options open to July. And naturally that goes for September, too - let's not tie our hands with anything except those two words I mentioned from the monetary policy statement, prudency and confidence. Being prudent means that we cannot expect that uncertainty will conveniently go away. If we wait until all the uncertainty evaporates, we will end up acting too late. So, we can’t do that. This also implies a risk-sharing process in decision-making, important for monetary policy to acknowledge and to communicate to firms, households and governments. We are here to be a source of stability by safeguarding price stability. But you cannot wait until you get to a state of the world in which there is no uncertainty; our framework will always involve taking decisions under uncertainty. Then we must also be confident. For example, as I mentioned, the acceleration of inflation in May - which I understand can be disturbing, given the decision we took last week to cut rates - was already forecasted since September. We are confident about the disinflation process and about the present circumstances. If shocks arrive, or if something new appears in our policy environment, then we must react to that. But those are risks, not the baseline. The baseline is very strong. It has been like that since the peak of inflation in October 2022. The first time we forecasted inflation for 2025, not even knowing that the rate peak was already achieved, our number was 2.1%, 2.2%. It has been consistently close to 2% ever since, and that's the confidence that we must now have in our decisions.

Q: Many observers thought it was a hawkish cut, but technically Madame Lagarde left July open, she didn’t exclude it.

A: Yes, because not excluding July is consistent with the definition of data-dependency and our meeting-by-meeting approach. And in general, if you consider everything we know today and compare it with what we expected last September, the big picture is the same, but the trajectory of inflation is lower.

Q: What about the US Federal Reserve’s ongoing reluctance to cut rates?

A: Since the beginning of the crisis, we knew that the US economy would diverge from the European economy in several dimensions. Inflation in Europe at every point in time has been more supply-driven than in the US. Demand, with respect to both fiscal stimulus and consumption, was always stronger in the US than in Europe. In the case of the fiscal stimulus, the difference is huge - 20 percentage points in four years of excessive US fiscal deficits. In addition, the labour market in Europe increased in size faster than the US and we did not have the wage pressures that the US had. All these elements - and we could continue - point to a very different situation in the US, which doesn't mean that we did not benefit, indeed globally, from the synchronisation of monetary policy decisions. We did, and that was good, because it was the first time that such synchronisation occurred at that level, all over the world. But at this stage, we need to look at European data. And that's it.

Q: It would however be easier for the ECB to cut if the Fed cut.

A: In a global world, the more synchronised economies are, the simpler is the function of every policy. Monetary policy is not an exception. But it is also true that we were synchronised when we could be synchronised, when we had that possibility. But as divergence has already materialised with the ECB’s interest rate cut in June and the Fed not cutting, we need to follow our separate paths, because it's inflation in Europe and in the US do not have the same characteristics. Also, fiscal policies were not coordinated in the two areas; our consumers are different; the labour markets operate in different ways. We cannot force European policy to follow American policy.

Q: If the ECB forecasts materialise, if the projections are right, what does that imply for where monetary policy can get to in the coming quarters?

A: We have a target, which is inflation at 2%. We don't want inflation to undershoot. We already spent a long period of time with too-low inflation. We cannot risk undershooting, because inflation below 2% is as undesirable as inflation above 2%, according to our monetary policy strategy. So, if we are successful, and we will be, inflation will end up revolving around 2%, meaning some months above 2%, others below, but as close to 2% as possible. Staying at exactly 2% forever is not going to happen because of the bumpiness (always there), but we can revolve around 2%.

Q: Then another two rate cuts should be easily possible during the rest of the year.

A: I can’t look ahead with that degree of precision because of our data dependency, but the disinflation process is well anchored in the economy and compatible with us proceeding in the trajectory that we just started on. I don't know the pace, but we all know the direction. The direction is simple to gauge, because we all know that the natural rate is lower than the current rate. So that's the direction we must continue in.

Q: You and Governor Holzmann look at the same data and come to very different conclusions. Are the data subject to varying interpretations?

A: Without comparing myself specifically to Governor Holzmann, let me try conceptually to identify the source of such differences. The difference between one stance and another – and there are as many different positions as there are members of the Governing Council – is essentially about how sensitive you are to risks: the risk of inflation undershooting, the risk of creating a bigger-than-desired stimulus to the economy, the risk of inflation stalling at a too-high level for too long. Like you said, it’s the same data, so there’s no getting around the fact that inflation has come down faster than expected and the economy has finally showed some signs of recovery, which I hope can continue. But how you feel about the risk, the trade-off over time of holding a given level of interest rates and the impact it may have on our economy, that's the difference.

Q: Would the flip side of the coin be the fear of getting behind the curve?

A: You can look it you can look at it both ways. If the labour market does not hold up, we will be helped by the economy in bringing inflation down.

Q: But faster than you would want.

A: Totally. So, yes, that’s the flip side of the coin. It's the same coin, it's the same data, it's just that some of us value certain risks more than others, and that leads to different views. Which is perfectly normal. It’s just one consequence of being totally concentrated and focussed on reaching our goal.