Exclusive: ECB’s Centeno: Recent PPI Data Call Into Question the Adequacy of Our Easing Pace

9 July 2024

By Isabel Teles – SINTRA, Portugal (Econostream) – The decline of euro area producer prices since the end of 2022, confirmed by weaker-than-expected May data released last week, is grounds for the ECB to ask itself whether it is easing monetary policy rapidly enough to avoid undershooting inflation, according to ECB Governing Council member Mário Centeno.


In an interview with Econostream on the margins of the ECB Forum on Central Banking (transcript here), Centeno, who heads the Banco de Portugal, said that the producer price data were ‘a concern because falling prices are precisely the opposite of inflation.’


‘[T]here is an underlying element in the price formation mechanism that we should worry about because the objective of monetary policy is not to bring inflation below 2% and even less to territories close to zero’, he said. ‘Therefore, these data should also make us think about the adequacy of the current pace of the easing trajectory.’


The ECB had ‘no reason to undershoot inflation’, he said, especially considering the weak growth in the euro area.


‘Inflation is converging to 2% from above; undershooting will imply that, at some point, inflation crosses the 2% target’, he said. ‘We want to be close to 2%, but with an economy that isn't growing, a little above 2% wouldn't hurt either.’


Nevertheless, there should not be an overreaction to ‘the less positive than expected’ June Manufacturing Purchasing Managers Index (PMI) for the area, also published last week, and the ‘good news from the first quarter’ should be put into perspective as well, he said.


Centeno warned that the much-heralded ‘soft landing’ of the euro area economy was really a descent to an extended period of low growth. ‘That is, we are not seeing a soft landing for growth; growth is below potential’, he said.


This, in conjunction with a return of inflation close to target, justified erring on the slightly higher side of the ECB’s symmetrical price stability target, he said: ‘In my view, with low growth, it is better to have inflation at 2.1% or 2.2% than at 1.8% or 1.7%.’


The ECB was confident about its ‘solid’ baseline scenario and the ‘June forecast essentially confirmed the one from March’, he said, with small deviations from the medium-term target no reason for alarm.


‘The target is 2%, and we must convey a sufficient degree of confidence so that we are not disturbed by a 0.1 percentage point deviation six quarters away’, he said.


The ECB’s monetary policy stance’s trajectory ‘points clearly to falling rates’, he said, calling the economic agents, including markets, to gradually adapt their behaviour in a manner consistent with this downward trend of borrowing costs.


If incoming data continued to confirm the ECB’s scenario, there would be more interest rate cuts this year, the number and magnitude of which to be determined at each one of the four remaining Governing Council meetings, Centeno said.


‘The baseline scenario is solid. It has risks like all scenarios, but it has demonstrated that our models capture the important trajectories of the variables of interest, namely employment, wages, inflation and activity’, he said. ‘Hence, looking forward, we will have a few more cuts this year if the base scenario is confirmed.’


The July meeting would be ‘as all the other meetings’ in terms of discussing interest rates, with wage data playing an important role, he said.


‘The economic activity growth forecast is supported by consumption growth, and that can only happen if real wages rise’, he said. ‘And so, we just must get a good picture of how gradually real wages have to rise.’


Waiting until all economic uncertainty was eliminated to make interest rate decisions would risk being too late, he warned.


‘We would always like to decide with more certainty, to get more data and more information and so on’, he said. ‘This has two sides, and if we want to wait until a day when uncertainty no longer exists, it is certain that it will be already too late.’

In new decisions, the ECB would draw attention to the fact that financing conditions remained tight and continue to be prudent and gradual ‘making sure we do not go back and forth with our decisions’, he said.