MNI INTERVIEW: ECB Could Discuss Cut Timing In January-Centeno

It is possible the European Central Bank could discuss criteria and timing for an interest rate cut at its next Governing Council meeting in January, Bank of Portugal Governor Mario Centeno told MNI on Friday.

“We will see what happens in December, and with the end-of-the-year variables, inflation above all. But we have to be open to the idea that any decision is a possibility,” Centeno said in an interview, noting that surprisingly low inflation in November was “very relevant” and had brought the first cut of the cycle closer.

The ECB needs to prepare its thinking for when rate cuts will be needed because “at some point, it is not a matter of if, it’s a matter of when,” he said, adding that refusing to discuss conditions for cuts at that point, on the grounds that it would be premature, would be a mistake.

“We had better study the scenario that will take us there [rate cuts], so you are able to say that we are prepared for it. To just follow the numbers is not a good strategy for a policy maker,” he said.

But Centeno did not want to speculate as to whether the ECB could cut by as early as March, its second meeting of 2024, saying “we still have meetings ahead of us to allow us to take a decision.” It is still impossible to predict the date of the first cut, though “it is not difficult to imagine dates,” he said.

CORE INFLATION

Asked whether it would be necessary for core inflation to fall below 3% to open up talks on cuts, he said the ECB only targets the headline figure.

“It is not important because it creates a focal number that doesn’t exist in our strategy,” he said, referring to the 3% figure mentioned to MNI by several eurosystem sources. “Analytically it might be okay, but for policy decisions it would be tricky.” (See MNI SOURCES: ECB Needs Sub-3% Core Inflation To Consider Cuts)

The ECB’s currently restrictive stance will persist even as rates are cut, as real rates will continue to be positive as inflation declines, he said, though he stressed that caution was essential and that the line that separates “stable convergence [to the ECB’s 2% inflation target] to unstable” can be very thin.

“We talked a lot in the last meeting about non-linear effects on the economy, especially for credit. Non-linear effects in the economy are sometimes the result of policy,” he added.

FISCAL POLICY

Eurozone fiscal policy settings appear to be in line with the ECB’s goal of bringing inflation back to 2%, Centeno said, adding that budget deficits are at reasonable levels in aggregate. Talks on reforming limit on government borrowing in the European Union’s Stability and Growth Pact would also lead to reducing risks, he said, adding that he hoped that any resulting deal would lead to simpler rules.

“My main objective with simplicity is to avoid difficulties that governments and citizens have in understanding and applying [the rules],” he said, noting that concepts such as potential output or structural deficits were important but difficult for setting budgetary rules. (See MNI: France, Germany Far Apart Ahead Of Fiscal Rules Talks)