Exclusive: ECB’s Centeno: 50BP December Cut to Be Driven by Need to Avoid Undershooting

29 October 2024

By Marta Vilar – WASHINGTON (Econostream) – The European Central Bank must remain open on the size of a potential December cut, which will be driven by the imperative of not undershooting the ECB's inflation target, Governing Council member Mário Centeno said last Wednesday.

In an interview with Econostream (transcript here) on the margins of the International Monetary Fund annual meetings in Washington, Centeno, who heads the Banco de Portugal, said that ‘[a]t the December meeting, the most likely scenario is that we will cut again’.

The ECB must avoid making the mistake of indicating that rates can only be lowered by a certain amount, he said.

‘The decision for a larger cut will not hinge on any particular incoming data,’ he stated, ‘but by the need, at this point, to justify moving faster to avoid undershooting the target.’

Asked why he had seemed reluctant to the idea of a large move in October, arguing a few days before the meeting took place that the ECB should not ‘give big surprises’, Centeno answered, ‘Because I always prefer us to move gradually and predictably.’

From today’s perspective, Centeno agreed that a cut in December seemed certain. However, he readily acknowledged that leaving rates unchanged then could not be ruled out.

‘[N]ot cutting in December is also a possibility. We need full optionality because we need to be open to wherever the data are taking us. I totally agree with that, but holding rates in December requires a change in the course that data showed lately’, he said.

Despite not having a new round of projections at the October meeting, Centeno said that the ECB did a ‘mechanical update’ which showed inflation would return to target before it was expected.

‘In our numbers, it means that in the first half of 2025 we will get to 2%’, he said.

The head of the Portuguese central bank did not rule out returning to a low inflation, low growth scenario in the Eurozone.

‘Of course’, he said when asked if he shared this concern with some of his colleagues, ‘Because I don't see any transformation in the fundamentals of the economics of the euro area to think otherwise.’

The ECB could be jeopardising a soft landing if it kept its monetary policy stance tight ‘for too long’, he said.

‘We don't want to tighten too much for too long. That's in our monetary policy statements already. We must avoid that at all costs’, he added.

Centeno said that the ‘million-dollar question’ now was whether the labour market would hold up in the context of an economy with no growth until the ECB lowered rates ‘at least’ to a neutral level.

‘If that is possible, it will be a huge success, and the soft-landing story will remain true. But I can't avoid saying again that the risk of this not happening has increased lately and we might need to take interest rates below the neutral level’, he added.

The neutral rate ‘may well be’ below 2%, according to Centeno.

‘It's quite uncertain. I don’t mind adopting the interval that some give between 1.5% and 2.5%’, he said.

Centeno stated that he hoped that the ECB would have a predictable communication approach when the neutral level was reached, but returning to forward guidance would be too much.

‘That’s probably too extreme. Forward guidance now is not advisable but being more specific in our communication will be helpful to everyone’, he said.