Interview with Governor Mário Centeno to Reuters
The European Central Bank must highlight the “room for manoeuvre” it has given itself on inflation when it updates its guidance next week, or risk losing credibility, ECB Governing Council member Mario Centeno told Reuters on Tuesday.
After unveiling a new strategy last Thursday that will see it target 2% inflation in the medium term, rather than “below but close to 2%” as previously, the ECB is due to refresh its forward guidance when policymakers next meet on July 22.
“When we are reviewing the strategy, broadening the leeway of the allowable inflation trajectories, it is very important that the forward guidance is adapted to this new framework, otherwise it would lose credibility,” Centeno said in an interview.
He added however that “there is no overshooting logic or average inflation rate” in the new strategy.
Centeno, who is Portugal’s central bank governor, said the previous policy had created the impression the ECB worried more about price growth above the target than below it.
The new target is symmetric, which means “positive or negative deviations are equally undesirable” and gives the ECB, the central bank for the 19 countries that use the euro currency, “greater room for manoeuvre than before”, he said.
The aim of the strategy, Centeno said, is to see inflation converge towards 2%, taking “forceful and persistent” measures whenever it is too low.
“The strategy admits a temporary and moderate inflation values above 2% ... We must be patient and tolerant with deviations that we would not tolerate previously,” he said.
Centeno said the main causes of a recent rise in euro zone inflation “are eminently temporary” and are linked to the reversal of a value-added tax reduction in Germany, the rebound in oil prices and problems in global supply chains.
“It is expected that these factors, which will temporarily raise inflation in 2021, will not last and so our forecast for 2023 is 1.4%, significantly below 2%,” he said.
With COVID-19 vaccination programmes bearing fruit and the economy withstanding successive waves of the pandemic better, recovery in the medium term is not at stake, he said. But there is “enormous uncertainty about the evolution in the short term”, especially in hard-hit service sectors such as tourism.
Centeno said the ECB must be careful removing support measures as insolvencies and unemployment tend to increase in the final stages of an economic recovery.
He said the ECB’s Pandemic Emergency Purchase Programme “plans net purchases by March 2022 and then, at least until the end of 2023, there will be a reinvestment phase”. PEPP, which is worth up to 1.85 trillion euros ($2.18 trillion), was launched last year.
“The decision has not been made when to move from reinvestment to divestment,” Centeno said.
Of the Asset Purchase Programme (APP), which was introduced during the bloc’s debt crisis in 2014 and has stricter rules than the PEPP, he said “there is an expectation of durability”.
Centeno stressed that even after the 18-month long strategic review that produced its tweaked inflation target, “the ECB has not changed its mandate, in which the priority is price stability”.
“It isn’t a dual mandate like that of the U.S. Federal Reserve - growth and price stability,” he said.