Transcript of Interview with ECB Governing Council member Centeno on 23 October 2024

29 October 2024

By Marta Vilar – WASHINGTON (Econostream) - Following is the full transcript of the interview conducted by Econostream on 23 October with Mário Centeno, Governor of the Banco de Portugal and member of the Governing Council of the European Central Bank:

Q: Governor, the market is giving a strong probability to a 50bp cut in December. Are these expectations reasonable? Why did Madame Lagarde not give any hints?

A: We are guided in our decision-making by data dependency and our meeting-by-meeting approach. If we are data-dependent, it's natural that you don't give too much guidance about the next meeting prior to getting the data. That's also how I think we need to operate. But, we are easing the monetary policy stance. This means cutting rates, and this will continue. At the December meeting, the most likely scenario is that we will cut again. Then there’s the question of cut size. Data will tell and we need to remain open. We mistakenly sent a message early this summer that only forecast meetings were to be used to adjust interest rates. That was a mistake, and then October came. We need to avoid that. It would also not be right to say that we can only adjust interest rates by a given amount. The cut size that will be on the table is open so that the data can tell us what it needs to be. We are not restricted to always taking steps of the same size.

Q: How should the data look to get a 50bp cut?

A: That's a complex question because we will get a lot of new data. We will have a new forecast, we will have two new prints for inflation, and more data will come in other domains that we follow. So, the question we may need to answer is how fast we need to get to a neutral interest rate to avoid the downside risks we identify, namely that stronger monetary policy transmission may dampen demand more than needed. If we understand that this is an important risk that we see materialising, then we need to move faster. The decision for a larger cut will not hinge on any particular incoming data, but on the need, at this point, to justify moving faster to avoid undershooting the target.

Q: A few weeks ago you said that you wouldn't go for a 50bp cut because that would be a big surprise for the market. Was that because you were generally against 50bp or just in October?

A: Because I always prefer us to move gradually and predictably.

Q: Predictably is the key word there.

A: I am all in favour of being gradual, so that once you see your destination and you know where you are heading, you can draw a path that is well understood and gradual. Moving faster is sometimes needed, but you can move faster and still be gradual and predictable.

Q: Is moving faster needed now?

A: We must see the data. That’s the point. As the downside risks materialise and if they increase in the short-term, both for activity and inflation, moving faster can become more appropriate. But that will be all about the data. I can put it differently: the important question now for us to answer is whether reaching neutral is enough. Because if we take out the base effects, now we are converging to 2% from below, not from above anymore. The last mile is not a mile from above, it's a mile from below. And that changes everything.

Q: Yesterday you said we shouldn't be so obsessed with hitting 2% precisely. But the key sentence that President Lagarde always repeats is that 2% should be reached sustainably in a timely manner. What does 2% mean?

A: To me, it means that we need to be in the vicinity of 2%, that 2% is the nominal anchor of expected inflation. If we don't move this nominal anchor, we are okay. The difficult part of monetary policy is precisely setting this anchor. It has been there throughout. It hasn’t moved. I believe this is the greatest evidence of our success. That said, it was not exclusively because of monetary policy - let's be fair with others, like workers, firms and governments. We need to share the credit with all these economic agents and get them to come along with us in the final stretch of the process. Our work is not completed. It is a symmetric target, so we can allow it to be below or above for some time. We should not panic because of fluctuations around 2%. That’s inevitable.

Q: Back to the 50bp cut, do you think that such a move will be a point of contention in the Governing Council?

A: It’s going to be all on the data. There’s no other ingredient to this decision-making process besides the data, the trend, not the data point. Remember that October’s cut was not originally in the cards, either. Some even commented that it was too short a period between the September and October meetings for us to get sufficiently new information to do anything besides leaving interest rates unchanged. That's never a good way to put things. So, you might get resistance from some of my colleagues because of the way they expect the economy and inflation to evolve. I'm also not being too assertive in stating that we must do more than what we have done so far. We need to see the data. So, let’s wait.

Q: If the data do not bring any more downside surprises between now and December, does that mean that we wouldn't see a cut?

A: Yeah, not 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.

Q: I'm not sure to what extent no change of rates in December is really on the table. It seems like a cut is 100% sure.

A: With the information we have today, yes. But the December meeting is not for another seven weeks and there will be new information between now and then. And we need to evaluate where that information is taking us. The decision is not simply to cut, but to decide whether getting back to neutral is enough to ensure that inflation will be at 2%. So far, we’ve only been concerned with easing the monetary policy stance to ensure convergence of inflation to 2%, from above. In my opinion, that convergence is already completed. Now we must guarantee that we don't pass the 2% mark and that the last mile doesn’t reverse.

Q: The October decision was unanimous. When do you expect that unanimity to show its first cracks?

A: Consensus in collegial bodies is important. What I feel at every moment of every Governing Council meeting, even when we disagree, is that we all make a huge effort to reach consensus. I think that this will continue to be the case. The next difficult decision will occur if we need to go below neutral. We have different views on the neutral level. Some may start feeling we’re at neutral sooner than others. We will need to be pragmatic on that front.

Q: How far before 4Q 2025 do you expect to reach the 2% target?

A: We didn’t have a forecast in October. As usual, we did a mechanical update based on the latest data, an exercise that moved the quarter in which inflation will reach 2% a little bit closer to today (the IMF expects this to happen already in the fourth quarter of 2024). In our numbers, it means that in the first half of 2025 we will get to 2%. That’s good. As I said before, our success has a lot to do with our ability to strongly anchor expectations. We never de-anchored. The crucial point was that the nominal anchor did not move. We are expecting inflation to be slightly below 2% for a long period of time. The forecast will tell for how long and by how much, but that will not be a problem if the baseline materializes. That tells you one thing: we need to move fast to a neutral zone and then decide whether that is enough to keep inflation as close to 2% as possible.

Q: Do you think a Trump victory in the US elections could alter the ECB’s interest rate path? Yesterday you said that the effects of his victory would not be permanent.

A: We need to evaluate his policies and what the impact of those policies will be on prices and activity going forward. My reference to the effects not being permanent was based on an evaluation that I make that Trump economic proposals are not coherent. There will be changes in the future, because otherwise, the US economy would suffer. But from the perspective of monetary policy, that will be an external shock and we need to evaluate whether the impact on inflation will be permanent. Tariffs for sure have an impact on the level of prices. Whether the second-round effects contaminate inflation will depend on the way the economy reacts, on innovation, on our capacity to find alternatives. So, we may not need to worry too much about it. We already experienced tariffs in the first Trump administration and there was no spurt of inflation. That said, Trump election would not be great news for the world. And we need to cope with that. Brexit was not a great idea, either. But we coped with it, without an impact on inflation, even though the UK was probably more important to Europe than the US is, in economic and financial terms. We need to evaluate all of that and not draw hasty conclusions that might be primitive.

Q: Do you share the concern of some of your colleagues that we will eventually go back to a low-inflation, low-growth scenario like before the pandemic?

A: Of course. Because I don't see any transformation in the fundamentals of the economics of the euro area to think otherwise. We suffered a sequence of supply shocks. These are done. If at the end of the process we can normalise monetary policy at neutral interest rates, different from zero, say close to 2%, that'll be a great success. But that’s not guaranteed. So, we should not underestimate the capacity of undershooting in this process.

Q: So, there is a risk of getting to a point where interest rates go to zero again.

A: I won’t say zero, but I would say that we need to act to prevent that.

Q: Are you worried that the ECB might be jeopardising a soft landing by keeping rates in such restrictive levels?

A: If we tighten for too long, whatever the environment around us, that's a possibility. 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. One good thing now is that no one talks about the sacrifice ratio.

Q: Some observers are convinced that the ECB will deliver cuts at every meeting in the first half of 2025. Do you think that this is reasonable?

A: The positive implication of that opinion is that we are not restricted anymore to forecast meetings. But we need to look at the data and then evaluate it with full optionality. Our reaction function is what guides our policy decisions and we have to be transparent on each of the three ingredients of the reaction function. And all of them are being fulfilled. Headline inflation is below 2%, underlying inflation forces are pushing the numbers down, and transmission is still occurring. We still have a lot to see in terms of transmission of monetary policy. Which means that all three ingredients are okay right now and we must be glad about that.

Q: As a labour expert you've been pointing to warning signs in the labour market. How much more worrisome has the situation become? Are you expecting a sharp increase in unemployment, or is it just going back to normal?

A: I adhere to the baseline. The baseline is still solid, but the downside risks have been accumulating. There are a few numbers that raise concerns, such as vacancies going down by 21%, or recent job starters going down by 10%. These are all early indicators of some weakening of the labour market. And that's the most important question in the euro area: how long can the labour market numbers be consistent with an economy that doesn't grow? It’s the million-dollar question: can this tension persist until we bring interest rates to at least 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.

Q: Is the weakening of the labour market enough for you to be less worried about services inflation or wage growth?

A: Wages do not serve inflation only, they are important for growth as well, so we need to be very careful. We cannot get increased buffers for families, which means savings, and consumption increases, if wages do not grow. We need wage growth high enough to allow for real income increases to make up for the losses that were observed in the inflationary process, which were very significant in the euro area. So, using the expression “elevated wages” for me is very hard to understand. I don't think wages are elevated. We need to adapt that sentence to what our numbers show, and they show that we have been pretty good at forecasting wage growth. We are forecasting wage growth to be in the range of 3% next year, and I have serious doubts that 3% for the euro area in 2025 - given the losses we observed during the period from 2021 to 2023 - will be enough to the recovery sustained by consumption. Services inflation is coming down, it was slower to go up, it is natural that it also takes longer to come down.

Q: Usually policymakers say the neutral rate is between 2%-2.5%. But you said that it might be below 2%.

A: It may well be. It's quite uncertain. I don’t mind adopting the interval that some give between 1.5% and 2.5%. It's a very large interval. It's something that is important as a reference, but it's not crucial for us to have a precise number for that as we approach this range. The data-dependent principle will not be useful once we reach neutral. And I hope that by then we can create a communication consensus in the Governing Council to help us be predictable.

Q: Like you were before with forward guidance.

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