Mario Centeno argues that the risk of too large measures on interest rates becomes significant

The governor of the Bank of Portugal (BDP) said this Monday that the decline in inflation to the European Central Bank’s (ECB’s) 2% target is close and the risk of “too much” in monetary policy is starting to become significant. .

In an analysis of the current economic situation, published this Monday by the banking regulator called “Crossroads of Politics”, Mario Centeno reflects on the economic problems facing Portugal and the euro area, as well as the way forward for policies, arguing that the Situation requires a policy oriented for the stabilizing function.

“In the monetary dimension, the risk of ‘too much’ starts to become tangible; inflation was falling faster than it was rising, and the economy is adjusting to the new financial conditions,” the BJP chairman writes in his report. analysis to be published annually.

“Inflation should approach 2%” as “in the absence of new shocks and with the transfer of monetary policy to the economy, the medium-term target is within our reach in the near horizon,” he said.

Mario Centeno’s analysis comes ahead of next week’s ECB Governing Council meeting, which officials say will be data-driven.

“The (external) economic situation is showing signs of slowing down and even has recessive aspects. The eurozone economic data released in July is not encouraging, but the scenario in which we avoid a recession is still at the center of our assessments,” adds the Portuguese governor.

In support of this argument, he points to trends in eurozone fundamentals in July: lending has been weakened, there has been a greater contraction in the private sector, consumer confidence has improved, investor confidence has deteriorated, weakened and is almost stagnant in service sector activity, recession is worsening in manufacturing, eases pressure on prices and slows employment to a minimum.

According to Mario Centeno, once “the movement towards price stability is secured, monetary policy should follow a predictable path of lower interest rates, but far from the times of zero or even negative interest rates.”

He also believes that on the fiscal front, “a balance needs to be maintained to reduce debt in an environment of low inflation and higher interest rates.”

He also recalls Europe’s response to the pandemic, stating that “this majestic moment of European construction must be followed by a response to a new crossroads.”

“Economic policy must continue to fight the causes of inflation, as this is a symptom that minimizes the risks of destabilization for citizens and lays the foundations for a new economic cycle. In this difficult time for geopolitics and economy, the stability and predictability of politics are our biggest asset,” he said.