MNI INTERVIEW: ECB Agrees On Gradual Cuts To Neutral - Centeno
MNI (ROME) - There is agreement within the European Central Bank’s Governing Council for continuing its easing cycle with gradual, 25-basis-point moves on its way to the neutral rate, Bank of Portugal Governor Mario Centeno told MNI, though he added that officials should not be afraid of bigger cuts if they become necessary.
“If things go well we will be able to stabilise inflation at 2%. My best range for the neutral rate would be somewhere between 1.5% and 2%,” Centeno said in an interview late on Friday. “We do believe, as a group, that gradually means moving at a steady pace. In the event that we need to do it faster, it would be self-evident and the reason would be easily understood by everyone.”
If the need does arise to cut more aggressively, in 50-basis-point increments, policy makers should put aside any fears that this would send a message of undue concern about the economy, according to Centeno, speaking after President Christine Lagarde said some officials had floated the idea of a 50-basis-point cut at the Dec 12 meeting.
“People say that if you do 50 it’s because there is a problem. But it won't be problematic. It would be problematic if we need to move and we don't,” he said. (See MNI ECB WATCH: ECB Cuts 25BP, Drops Restrictive Language)
Whether rates end up closer to 2% or 1.5% will also depend on the cyclical component of Europe’s economy, he said, adding that labour market resilience has led many to overestimate the strength of recovery.
STRENGTH OVERESTIMATED
“The cyclical position of the euro area may be worse than we are evaluating right now and that’s an issue that we need to address in our interest rate decisions,” he said, defending the need to “act pre-emptively” to avoid deterioration of the labour market, which would feed into prices and a weaker economy.
“If we enter a cycle of weak economy - weak labour market, price increases won’t be an issue for Europe. Prices are endogenous,” he said, rejecting the argument that sluggish growth is entirely due to structural issues which monetary policy is unable to address.
“There is a cycle around it, the economy fluctuates around cycles,” he said, stressing that policy should stabilise, not increase the volatility of these cycles.
In the ECB’s December projections, investment and net exports were revised down while public investment and consumption were revised higher, noted Centeno, saying that this is concerning because these latter categories “can’t be sustainable drivers of economic growth.”
Europe needs to work to improve its single market and establish capital markets union, he said, adding that this would be a more important factor for the eurozone than any effect from the fiscal stimulus which might be enacted by President-elect Donald Trump in the U.S., where growth has been supported “by huge, I would say brutal fiscal deficits,” which are “quite unsustainable.”
The ECB has essentially completed the so-called “last mile” of the battle to reduce inflation to its 2% target, barring any shocks, according to Centeno. While this year’s projection is for prices to increase by 2.4%, some 40 basis points of that comes from fiscal measures now being unwound, he said. Without the impact of fiscal measures inflation would already be at 2% this year, and it is set for the same next year, he added.
The likely overshoot in the first part of 2025 is also due to one-off effects, he said.
Asked how the ECB should respond to the slight undershooting of the inflation target projected for 2026, when it is seen at 1.9%, Centeno said monetary policy should not place more burdens on the economy than strictly needed to stabilise inflation at 2%. European companies are striving to keep the euro area economy afloat by retaining jobs and boosting real wages, he said.