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Interview with Governor Mário Centeno to Bloomberg

The European Central Bank must tread carefully at upcoming meetings after signaling its determination to fight record inflation with a jumbo interest-rate increase this week, according to Governing Council member Mario Centeno.

While the decision to accelerate hikes was “very important,” officials must “remain predictable and acting at the margin in as small steps as possible,” the Portuguese central bank chief said in an interview in Prague.

“The worst-case scenario for a policy maker is to be seen going back and forth in decisions and going after the data,” he said. 

Centeno spoke a day after the ECB lifted its key interest rates by a historic 75 basis points -- matching the urgency of the Federal Reserve in stamping out soaring prices. Officials said they expect to raise borrowing costs further at the next several meetings, without specifying by how much.

While Centeno -- one of the Governing Council’s more dovish members -- declined to reveal his preference, he highlighted that the Governing Council described Thursday’s decision as “front-loading.” 

“It means that we’re acting faster than we envisaged in June or even in July,” he said. “That doesn’t mean that we’re moving the end point up.” 

The peak of the monetary-tightening cycle, known as the terminal rate, has yet to be determined as officials adopt a meeting-by-meeting approach on rates in the face of immense uncertainties stemming from the war in Ukraine.

But for Centeno, describing recent moves as “front-loading” suggests subsequent steps will be smaller if the terminal rate doesn’t move higher, even if other Governing Council members are open to a second 75 basis-point hike in October.

Without more clarity on the cycle’s peak, he considers it premature to discuss reducing the 5 trillion euros ($5 trillion) of bonds that the ECB purchased during recent crises -- first to head off deflation risks, then to support the economy through the pandemic. 

Some of his colleagues have urged a debate this year on when and how to offload those securities -- a process know as quantitative tightening.

“The policy rates are clearly the best instrument for us to deal with the present situation,” Centeno said.


Labor Strength

Despite his caution, and even after recently warning against excessively rapid rate increases, he called Thursday’s unusually large move “the right signal to send,” demonstrating the ECB’s inflation intent to governments and workers. 

Fiscal policy or excessive wage settlements shouldn’t undermine those efforts, according to Centeno, a trained labor economist. To uphold Europe’s favorable employment trends -- the euro-zone jobless rate is a record-low 6.6% -- “wages can’t increase above what the market can pay,” he said. 

This week’s decision makes “all participants in those negotiations very much aware of the risks we may face,” he said.

“I really would like to urge labor-market participants not to be too exuberant.”