Centeno: inflation is more unfair than measures to combat it

Bank of Portugal Governor Mario Centeno said keeping interest rates at current levels would be “crucial” in reducing inflation, which he considered “more socially unfair” than measures to combat it.

“We think that if we keep them [as taxas de juro do Banco Central Europeu] At this level, we will do something decisive to get inflation closer to 2%, which is our goal. The most important thing at the moment was to provide some predictability so that we can adapt to what awaits us in the coming months,” Mario Centeno told the Spanish newspaper El Pais in an interview published this Monday.

The interview came after the European Central Bank (ECB) announced on Thursday a new 25 basis point hike in three key interest rates, pushing the deposit rate to its highest level in eurozone history.

Mario Centeno admitted to El Pais that “in monetary policy there is always the risk of doing too much,” as happened in 2008 and 2011, when the ECB “had to reverse the move because rising interest rates were incompatible with prices and economic stability “

“This risk is real and we have to be careful,” he said.

Asked whether he now supported stopping the ECB’s rate hikes, Centeno said: “We cannot deviate from this path because inflation is more regressive and socially unfair than the measures we use to fight it, which are often harsh and harmful to the economy.” ” The problem is that inflation too. In the government council [do BCE] We’re trying to maintain that difficult balance.”

According to the Governor of the Bank of Portugal, “the key to further reducing inflation and resisting rising interest rates is the labor market, which is at a historical high” in Europe.

“Defending this new ‘status quo’ that moves us away from the stigma of stagflation is almost the responsibility of all policies, including monetary policy,” he said.

Mario Centeno added that “predictability and policy coordination” are needed to avoid “huge increases in unemployment and social problems”, while acknowledging that the situation is not the same in all European Union countries.

“Monetary policy is unique, although we know its impact varies. That’s what fiscal policy is for, and that’s what we achieved during Covid and rising energy prices,” he said, adding that central banks recommend “fiscal policy supports selective support for the most vulnerable because there is room in fiscal policy for this”.

Asked about the impact of rising interest rates in countries such as Spain and Portugal, where there is a large share of home loans with variable interest rates, Centeno said that central banks are appealing to “pre-existing savings opportunities and adjustments in the shape of how families manage their budgets “

“But we know it’s easier to do this if we know what the future will be. Managing expectations is what we also need to do with monetary policy to ensure predictability. And that’s what we reached on Thursday, a stage that brings predictability. “This is a commitment that European families deserve. In addition, there is public support that almost all countries have,” he added.

Regarding the large profits of banks in this context and the ability of banks to contribute to supporting families, Centeno said that “part of this is cyclical” and “banks should retain a significant portion of these profits because they may have to respond to the potential for downside loans”, which is currently not observed, “because the labor market is strong.”

“The problem with banks is that their cycles have a correlation that is difficult for citizens” to understand, who feel “more pressure” when “the banks do well,” he argues.