The European Central Bank should slow the pace of interest rate hikes from December and send a clear message that 75-basis-point increases are not the norm, as inflation is likely to peak this quarter, ECB policymaker Mario Centeno told Reuters.

The ECB has raised interest rates by a record 75 basis points at each of its last two meetings and has since July lifted its deposit rate by a combined 200 bps to 1.5% from historic lows.

"We are nearing rate levels that we consider compatible with price stability in the medium term, which means that the idea that 75-basis-point hikes are the norm cannot materialize," Centeno, who is Portugal's central bank governor, said.

"It's important to end this cycle of increases in a credible fashion, and more important than the (rate hike) number itself is to transmit this narrative to the public ...

"We are really efforting to transmit that predictability about the future and I expect the December meeting to be very clear on that," he said in an interview.

Centeno declined to predict whether interest rates would go up by 50 or 25 bps next month, or whether more hikes would be needed next year.

Inflation in the euro zone was 10.6% in October, more than five times the ECB's 2% target, but Centeno said data suggested inflation would peak this quarter. He cited World Bank estimates that prices for energy, minerals, food and fertilizers would decline next year.

In his view, high inflation is not entrenched in Europe and there are no second-round effects from wage increases, which have been well below inflation so far.

"This is frankly positive and very different from what happened in the United States, where the labour market from this point of view is rather overheated," Centeno said.

Other structural differences also justified interest rates in Europe at roughly half those in the United States, he added.

At 1.5%, the ECB's main interest rate is now close to a theoretical "neutral" rate that keeps inflation in check without undermining growth, Centeno said.

Asked about market estimates of a 3% "terminal", or maximum rate, he said it was more difficult to define than the neutral rate, but expected "the December meeting to be very constructive and useful for the most correct identification of this ceiling".

Centeno said reducing the ECB's balance sheet after years in which it bought trillions of euros of bonds would be a "slow, gradual" process, but that "there is no doubt that it has to be reduced" to help transmit anti-inflationary monetary policy.

Policymakers will discuss in December how to end reinvestment of cash maturing in the ECB's 3.3 trillion euro Asset Purchase Programme, Centeno said, adding that it must first ensure so doing would not jeopardize financial stability.

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Further consolidation of Portugal’s banking sector is inevitable, European Central Bank member Mario Centeno told Reuters on Wednesday, calling “remarkable” the recent progress the country’s banks have made on strengthening capital and reducing risk.

Analysts have said that Portuguese banks should bet on M&A operations to achieve better competitive conditions, despite the five largest players’ owning 80% to 85% of banking assets.

Centeno said the system had made “remarkable progress” in recent years as banks strengthened their capital and improved risk profiles, while non-performing loans (NPLs) dropped to levels practically in line with the European average.

“After this reinforcement, consolidation of the banking system (in Portugal) and strengthening of its institutions is absolutely crucial and it is inevitable that the system, the market, will face that,” Centeno, who is also governor of the Bank of Portugal, said in an interview.

While the COVID-19 pandemic and the current crisis had postponed this process, “we will do it, as always, with great tranquility,” he added.

Portugal’s banks are still scarred from a debt crisis and a spike in NPLs after the 2010-13 recession. They have since reduced NPLs to a total of 11.4 billion euros ($11.85 billion) in June 2022 from a peak of 50 billion euros in June 2016, according to the latest Bank of Portugal data.

The NPL ratio for Portugal’s lenders was 3.4% of total credit in June, versus 17.9% in mid-2016.

“Although I am very satisfied with the evolution...there is no point in resting, we have to challenge ourselves,” Centeno said.

“It is important that this maturation takes place with a continued reinforcement of the institutions in their size, their capitalization and mainly in their capacity to respond to the challenges of digitalization, climate action, because this all goes through the banks’ balance sheets.”

The largest bank is state-owned Caixa Geral de Depositos; followed by Millennium bcp; Santander Portugal; Novo Banco, which emerged from the collapsed Banco Espírito Santo in 2014 and is controlled by U.S. private equity fund Lone Star; and BPI, owned by Spain’s CaixaBank.