Transcript: Interview with ECB Governing Council member Mário Centeno on 2 July
7 July 2025

By Marta Vilar – SINTRA, Portugal (Econostream) - Following is the full transcript of the interview conducted by Econostream on 2 July with Mário Centeno, Governor of the Banco de Portugal and member of the Governing Council of the European Central Bank.
Q: Inflation is now at 2%, trade negotiations could finally deliver the expected 10% universal US tariffs on European goods and Middle East tensions have eased. Are you optimistic?
A: The optimistic and cautious part is that we had very good Q1 GDP data that was a bit of a surprise and could be temporary. We need to remain positive and vigilant on this front, because if we do not have growth, we will not have inflation at 2%. Remember that before Covid, inflation was significantly below 2% and the fundamentals behind inflation have not changed much since the pandemic. We have been facing many shocks, but lower uncertainty will enhance investment and could help improve the situation.
Q: A July pause seems like a done deal, and some are growing a bit more sceptical towards a September cut. What is your view on that?
A: We promised not to act ahead of the data. We know inflation will decline further and we need it to move closer to 2%. Undershooting is the main risk now. If economic growth is flat in the next couple of quarters, investment doesn’t pick up, and inflation remains close to 1%, we will have to do something.
Q: As of now, do you expect the September projections to look like June’s?
A: The risks associated with the June projections were tilted to the downside, and that hasn’t changed. The uncertainty that surrounded us then is still with us now. If a tariff agreement is reached, that is per se good news because it will reduce uncertainty. But we know that tariffs might be deflationary and will be negative for the economy. The source of the economy’s dynamism in the June projections was consumption and public investment. We kept revising down these variables for the past five years.
Q: And you don’t expect that recovery to materialise.
A: It is a challenge for public investment to grow as forecasted. These are mainly Next Generation EU projects that our projections assume being fully implemented. We are one year away from the end of the NextGenEU. Expenditures must be completed by then and that looks difficult. So, we need to be cautious about it. Europe needs to find new sources of growth.
Q: To what extent can the ECB help the economy grow? Is another cut going to lead to an economy compatible with 2% inflation?
A: We are not here to stimulate the economy, but we want inflation at 2%. Without economic dynamism, inflation will not stay at 2%. We are not targeting economic growth. We are targeting inflation. Don’t get me wrong when I say that I would like to stimulate the economy. But with the current numbers we will still be restrictive at 2% if output doesn't recover.
Q: So, under the current circumstances we are restrictive.
A: Yes, we are restrictive because we have a negative output gap. Given the price evolution, the financial conditions, and output, we are not there yet.
Q: Given the current levels of GDP, what is accommodative territory? Is 1.75% already it?
A: It all hinges in the capacity of the European economy to recover while having inflation around 2%. In the last decade, this was not possible. We had low inflation despite the negative interest rates and QE. The efforts by the ECB to push inflation up didn't work. After that we had an unexpected and strong inflation surge. We took care of it in a competent way, with great success. Fighting inflation dampened demand and stabilising inflation at 2% is not the same game anymore. So now we need to be very careful. I don't know if 25bp will do the trick. But the amount and timing of further cuts are difficult to say. It all depends on how things play out in terms of investment, labour market, and of course prices at the end.
Q: The ECB now says it is in a ‘good place’, which to me means that at least for July, it seems clear that the ECB will hold. Do you think that something realistic can happen that would lead the ECB to move in July?
A: The June inflation reading was totally aligned with our forecast, both in headline and core. So, going into July, the data we already have is essentially aligned with the forecast and the underlying interest rate path. I think it's conceivable that we get to the July meeting with an amount of information that is compatible with either cutting or pausing. We are still waiting for the Q2 GDP data, and for everything to hold as we move to Q3 and Q4, we need economic activity to pick up. Otherwise, the pressure on the labour market will only increase. There’s a risk if new job creation keeps falling and that at some point we experience some tension in the labour market, contrary to what happened in the past couple of years.
Q: How likely do you think it is for the economy to pick up as the ECB needs it to in order to be compatible with 2% inflation?
A: Our baseline is consistent with all of that. So, we need the baseline to be confirmed, and we believe that is the most likely scenario. In the projections you’ll see that in 2027 we already factor in the impact of higher defence expenditures in countries like Germany, but also that inflation goes to 2% because of the impact of ETS 2, which is going to be sizable. Without the impact of ETS, inflation would be below 2% in 2027. It will only be felt in 2027, it’s a one-off.
Q: The trade negotiations deadline is next week, and a 10% universal tariff, which looks like the most likely outcome, is not the worst possible scenario. However, will uncertainty about trade still be very high after the deadline is over?
A: Closing the negotiations is just as important for securing a good deal as it is for reducing uncertainty.
Q: One of the effects stemming from tariffs is supply chain disruptions and fragmentation risks, but this is not incorporated in the projections because it is very difficult to factor it in until it materialises. Do you think these risks will materialise?
A: We need to build a scenario in which that may happen, but I don't see how that may be the result of trade negotiations. So far, tariffs affect only a small fraction of global production, in the sectors in which tariffs are implemented. I don't see how we could end up with supply chain disruptions unless we entered a war with suppliers of specific goods. If there were a trade embargo, for example, I could imagine supply chain disruptions. But we are far from there.
Q: Do you still think that the risk of a diversion of inexpensive Chinese goods to Europe is a risk?
A: We must understand one thing: China means negative inflation. If you squeeze some of the international trade channel with China, these products will definitely go to other destinations. So, the impact for Europe will be significant.
Q: Are you comfortable with how the ECB has projected the impact of the higher spending in Europe? Do you think the impact is accurate, or is it overestimated?
A: Public expenditures are usually overestimated because they take time to implement, and subject to delay, but we assume that they will be fully implemented. So, there is a big risk that the level of investment will fall short of what is projected. As of the impact, at least in the short term, defence spending has a smaller multiplier than the Next Generation EU because it is more concentrated in countries, in space, and in sectors, whereas the NextGenEU was a broad scope of investments and expenditures from the public and private sector across Europe. Of course, if other countries join in increasing defence spending, we will have to include the numbers in our forecast, and they will have a bigger impact.
Q: What is your view about exchange rate developments? Do you think that a reversal of the recent trend is likely?
A: That is a market outcome, and it's difficult to comment on market outcomes. If the economy really does not have the strength to support this appreciation of the euro, there will be corrections or at least some attenuation of it. So, we need to see what is going to happen.