Transcript: Interview with ECB Governing Council member Centeno on 20 March
26 March 2025
By Marta Vilar – LISBON (Econostream) – Following is the full transcript of the interview conducted by Econostream on 20 March with Mário Centeno, governor of the Banco de Portugal and member of the Governing Council of the European Central Bank.
Q: Governor, a few weeks ago, you said that further adjustment of rates was needed if the baseline projection was to materialise. Now that we see the environment changing - does the ECB need to pause in April to ensure that the expected inflation path continues to materialise?
A: We still see, and it is in our baseline, that the convergence to 2% inflation is consistent with the trajectory of interest rates expected by markets. The baseline incorporates a trajectory of interest rate reductions that is not yet completed. Given the fragility of the economy and where the neutral rate is estimated to be, we can expect further rate cuts. Uncertainty has increased and we must broaden our perspective, meaning that we could need to go slower, but we might also need to go faster. Tariffs are taxes, they will be negative for the economy. On prices, there are multiple effects. At the end, it depends on the extent of retaliation and the downward pressure on prices coming from higher competition in international trade. Therefore, we need to open our minds from the base strategy, but that doesn't mean that we need to deviate from that strategy.
Q: You said you could go slower, but also faster. Do you attach the same likelihood to one and the other? Going slower seems more likely than going faster.
A: I don't see any reason so far to deviate from the previous path. The impact of new US policies and higher uncertainty has been revealed faster than expected. The impact is negative on growth and eventually will also be negative on prices, because they are two sides of the same coin. I don’t see us entering a stagflationary process in any way. The deterioration of the conditions of the US economy and labour market will also imply that prices will not be sustainably higher there. Maybe only temporarily, but not permanently. So, I don't see a reason for us to deviate.
Q: When you say deviate, you mean pausing?
A: Exactly, I do not see the case for pausing sooner than previously expected. In Europe, the exchange rate appreciated, and that is not inflationary. Also, prices of energy and other commodities have been falling due to uncertainty and economic weakness globally. I don't see any strength in the European economy recently that could materially change my evaluation of what is going to happen in the next few quarters. I don’t see reasons to change the path that we were following. But, of course, I see reasons to broaden the spectrum of our analysis and be cautious.
Q: When you say you don’t see reasons to deviate from “the expected path of interest rates”, you mean the path that was incorporated in the March projections?
A: Yes, the path underlying the March projections. However, I am not subscribing to that market path, I am just saying that it is consistent with the continuation of the trajectory of lower interest rates and inflation at 2%. I don't see any issues around the timing of these cuts as long as we continue converging to lower rates. This is necessary, on the back of lower inflation, given the weakness of the European economy and the fact that recent developments will weaken it further. Such a weak economy will not be sustainable with inflation above 2%. Risks are still on the downside.
Q: One could argue that it would make sense to pause in April given the lack of projections and the proximity to neutral. What’s your view about this?
A: The most recent forecasts do not tell us to pause in April. We may need new projections to pause. At this juncture, neutral is not a very important concept, in the sense that it needs to be analysed together with other pieces of information. But, I am not sure that being at neutral will be enough to sustain inflation at 2% due to the current weakness of the economy and the threats it faces. Also, if the uncertainty and lack of confidence reduces the already subdued investment, that would not be compatible with inflationary pressures. Additionally, we are now seeing a substantial slowdown in wages. That was totally expected, but let's not fool ourselves; if the recovery in consumption in 2024, which supported the modest economic growth, was sustained by the recovery in real wages, we may wonder how a reversion of income growth will continue to finance strong consumption amid higher uncertainty, that will make citizens more cautious on their consumption choices.
Q: On the other hand, bond yields all over Europe have soared lately due to the news coming from Germany regarding higher spending, with the German bund around 3% a few days ago. Isn’t this tightening a reason for the ECB to cut further, to prevent unintended tightening?
A: It is a fair reasoning. One of the big risks we are seeing is whether further tightening of financial conditions will deter public and private investment decisions. Investment is the component that reacts the most to interest rates, especially residential and corporate investment. This is even more relevant considering that part of public investment coming from the Next Generation EU will end. Europe will be paying this investment back very soon, restricting the scope for fiscal policy. We don’t want to see tighter financial conditions in the coming quarters that may prevent investment from growing. However, I think the market may correct itself as this increased spending and looser fiscal rules will also provide some confidence to invest. If these spending packages are well-designed and create more confidence in the markets, we could expect these rates to adjust downwards. We need to monitor this closely.
Q: But higher spending could be inflationary.
A: It is difficult for investment decisions of this sort to create an inflationary problem. These are very specific sectorial expenditures; I don't expect them to translate into HICP. We want the economy to be stronger than in the last years. But, for that to happen, we need further adjustments in rates.
Q: Which data sets do you think are going to be the most important for your judgement in the April meeting?
A: It will be important to continue, for sure, looking at monthly inflation prints. Lately, we have been quite precise in inflation forecasting. I hope we continue to be reassured on this. Wages are also something we need to monitor. Probably, at this juncture, sentiment indicators are also important. If we enter a spiral of negative sentiment, that will translate into a subdued economic growth.
Q: What importance do you attach to the BLS, given some of your colleagues’ comments about it being an indicator of current lower restrictiveness?
A: I think we all agree that we are not as restrictive as we were before. However, if you look at credit flows in real terms, they remain lower compared to pre-inflation period levels. Even if credit recovers somewhat, it is still low. But we can conclude that we are less restrictive today.
Q: How far are we from the point where rates are actually NOT restrictive anymore?
A: I think we need to see a dynamic in demand that we still are not seeing, especially coming from investment, crucial for sustainable growth.
Q: Recently, you said that ‘the journey is clear’. Does this mean you believe that the direction of rates is clear?
A: Yes.
Q: Is it reasonable to expect interest rates to reach 2% by the summer? Or is autumn more reasonable?
A: I'm not going to refer to any specific meeting or levels of interest rate. However, given the latest data and the risks we are seeing for the economy, I am in favour of getting to a level of interest rate that is compatible in the medium term with inflation at 2%, and it will be better if we do it sooner rather than later. I see risks accumulating in parts of our economy. For example, in the labour market. Some say labour hoarding explains the good behaviour of the labour market compared to GDP growth. But even if this was the case – I do not completely agree -, labour hoarding will not last; firms need activity growth to preserve jobs. Closing the circle requires lower rates, at levels that can also help the economy turning around.
Q: You said that we should get to that level of interest rates that sooner rather than later. Do you believe that there is a risk that the ECB could eventually be behind the curve?
A: Higher uncertainty makes it more difficult to determine if we are behind the curve. As uncertainty increases, we must take a broader perspective, and this doesn't allow us to easily say if we are behind the curve or not. The fact that we have a strong labour market and a weak economy is not sustainable over a long period. Additionally, labour market adjustments are very fast. So, if the situation deteriorates and firms decide to adjust their labour force due to uncertainty, that could be quite detrimental for the stability of all the process. The soft landing is tributary of the strong labour market. For that to continue to be the case, we need to see two things: inflation going down, as we have seen lately, and policy adjusting accordingly, also something we have been doing with great success.
Q: Are we ‘almost at neutral’ like Governor Knot said today?
A: The meaning of the word “almost” is not precise. I think we are approaching a moment in which we can better evaluate whether we are already in neutral territory or not. Anyway, it is important to bear in mind that the concept of neutrality supposes the economy is at a steady state, and that is not the case. The economy is running below its potential, reaching the neutral rate may not be enough to keep inflation at 2%.
Q: The next question would naturally be where the neutral territory is.
A: It is very difficult to estimate the neutral territory, these are unobserved variables. The concept about neutral territory is very useful but should be taken together with other information. Thus, interest rate approaching the neutral territory is a good indicator. But then, we need to also evaluate if other dimensions of the economy are also capable to stabilize.
Q: In December you said that your estimate of neutral would be around 1.5-2%. Would you stick to that estimate now?
A: Yes, I have no reason to change my assessment on that. And that is a great success for Europe, given how long we have been at the lower bound.
Q: There’s an increasing number of policymakers who have recently suggested that inflation risks are now tilted to the upside, and not two-sided. What is you view in this regard?
A: I think there are risks on both sides. But I still believe that downside risks prevail. This is mainly because we don't have an economy that is compatible with inflation above 2%. If external factors push inflation up, we may see a further weakness in the economy, which will automatically bring inflation down. However, it is important to note that seeing inflation at 2.5% for a couple of months is not detrimental. Neither is seeing inflation at 1.5% for a couple of readings.
But if we face the same downward pressures on prices that we experienced before Covid, we will be back to square one in this fight, and that's something that we need really to avoid.
Q: Do you think that it is likely?
A: The likelihood of it is very difficult to determine. I don't think it is likely because I do think we can do something to avoid that happening. And this relates to a previous answer: I would like to see rates closer to 2% sooner rather than later because that's one way we can prevent that risk from materialising.
Q: We know the March inflation projections suggesting the 2% target will be reached in 2026 might not be accurate as they do not incorporate the decline in energy prices seen after the cut-off date. Given recent developments, when do you expect to reach target?
A: If we take the base effects out of the current inflation levels, we can be a couple of decimal points below 2%. If we look at the historical series of inflation prints for the Eurozone, less than 5% of them were 2%. Thus, being where we are today, it is like being at 2%. We have well anchored expectations, not moving away from 2%. ECB’s target is symmetric, we allow deviations to both sides around the target. If the 2% mark is reached either in Q3 or Q4 in 2025 or Q1 or Q2 in 2026, it does not matter much to me as long we have this anchoring of inflation in the medium term, and figures converging to around 2%. Therefore, I would not be worried about these variations. We should not overreact to decimal points.
Q: How satisfied are you with the latest growth forecasts? Do you think they are too optimistic?
A: We have revised growth forecasts downward for the sixth time in a row. It is a substantial revision. The figures I’d like to see moving as soon as possible are the data on investment. According to our current forecast, it will take four years for corporate investment to return to 2023 levels and eight years for residential investment to return to 2022 levels. It is too long. I can’t think of an economy in a good trajectory with these investment numbers.