Mario Centeno shows how rapidly rising interest rates are creating adjustment challenges for businesses and families

The governor of the Bank of Portugal (BdP) said on Wednesday that the speed at which interest rates rose created an adjustment problem for companies and families who found it difficult to respond.

This Wednesday, Mario Centeno spoke to the students of the Escola Secundária Nuno Alvares (ESNA) in Castelo Branco about the problems caused by the rapid rise of interest rates and inflation, as well as the “unfriendly” mechanism by which the Central Bank (ECB) should control the price level in economics and inflation dynamics.

At the Egas Moniz Library, the BJP chief explained to students that monetary policy was “not particularly friendly” to the people and the economy.

“What is the mechanism for controlling prices? Cool the economy. What this means is to reduce economic activity as much as possible so that prices can also have more controlled dynamics,” he said.

However, he added that the problem is that the counterfactual situation is even worse.

“Inflation is worse for our lives than a temporary collision with this therapy, which is not very pleasant. And that’s exactly what the European Central Bank has had to do since the middle of last year – raise interest rates. This was the biggest problem. with this process of raising interest rates? It was the speed with which it was done,” he emphasized.

Mario Centro also explained that when making changes to any economic policy, it must be taken into account that it targets people and companies, and decision makers must give companies and people time to adapt to this policy change.

“Personally, I do not believe in the idea of ​​a major financial, fiscal and monetary shock that will immediately transform our lives. The economy is always working at its limit. We always make decisions on the edge. And politics must also act. on the edge of our behavior,” he emphasized.

For the BJP governor, this was the “big problem” of the whole process. Inflation arose due to various external shocks, very strong, and central banks had very little time to act and act.

“In less than a year, we raised interest rates, something that has never happened in the history of the euro and has happened in very few, if any, episodes with central banks. The interest rate level that created the potential problem was the speed at which it was all done. Why? Because families and businesses haven’t had time to adjust to this increase,” he said.

And he summed it up: “When we are faced with an increase of this magnitude in such a short period of time, it is difficult for us to respond.”

The BJP governor also explained that the value that comes from price stability has a dual purpose: not to be too low, so as not to risk prices falling too easily, and not to be too high, so as not to disrupt all future plans.

“In particular, for the last two years we have been living in a period of inflation. In fact, inflation has reached double digits. This has not happened in Portugal for more than 30 years. Almost half of Portugal’s population has never experienced a moment of real inflation. “, he concluded.

Mario Centeno also stressed that in order to control inflation, it is necessary to change the way monetary policy is conducted.