Mário Centeno: "Inflation is more unfair than the measures to combat it"

Although he is far from the hawks of the European Central Bank (ECB), the economist Mário Centeno (Olhão, 55 years old) assumes jointly the rate hike decided on Thursday in Frankfurt. He considers inflation more unfair than the bitter recipe applied to it. Governor of the Bank of Portugal since 2020, he believes that the protection of employment, which is at an all-time high, must be an objective of all policies, including monetary, to avoid stagflation in Europe.

Question. The ECB approved last Thursday the tenth rate hike in 14 months. Is it going too far?

Answer. We believe that, if we keep them at this level, we will do something decisive so that inflation can converge to 2%, which is our objective. The most important thing at this time was to raise some predictability so that we can adapt to what is expected in the coming months. The risk of doing too much is always present in monetary policy, it happened in 2008 and 2011 when the ECB had to back down because the rate hike was not compatible with price, financial and economic stability. That risk is real and we have to be vigilant.

Q. You were in favour of stopping now.

A. The decision is made, we are all involved in it, beyond personal opinions. We now have the challenge of ensuring that the predictability that we added in the message of the [government] council materializes. We must lower inflation and ensure that the economic mechanisms are up to the task. We cannot deviate from this path because inflation is more regressive and socially unjust than the measures we use to combat it, which are often harsh and damage the economy. The problem is that inflation does too. In the [ECB] governing council we tried to manage this difficult balance.

Q. In the past, the ECB failed at times. Could you now underestimate the damage of this monetary policy?

A. Since the second half of 2022 we are basically stagnant. This means that the transmission of monetary policy is strongly felt, as seen in the fall in loans, which has been revised downwards. In the coming quarters, this impact will be felt even more. The key to continuing to lower inflation and resist rising rates is the labor market, which is at an all-time high. Since the second quarter of 2020, we have created almost 10 million jobs and almost half are occupied by people working in a country other than their country of origin. This is new in Europe, as is the low percentage of long-term unemployed.

It is almost an obligation of all policies, including monetary policy, to protect this new status quo that moves us away from the stigma of stagflation, which has three components: low growth, high inflation and high unemployment. We lack unemployment and I hope that we will not get there because it is supporting Europe's low economic growth. But the risk of a change in the economic cycle haunts us.

Q. Those good employment indicators could be threatened if Europe goes into recession.

A. We cannot be complacent about that: if we fail to take care of what we have conquered, it can easily be lost. The labor market never reacts gradually, it always reacts with very large jumps and variations. Job losses, compared to the current highs, which Europe had never recorded, can translate into large increases in unemployment and social problems that we must avoid. This requires predictability and policy coordination. We need to be more united.

Q. The situation is not the same in all countries. Can standardization of monetary policy be counterproductive?

A. Monetary policy is unique, although we know that its impact is different. That's what budget policy is for, and that's what we achieved during covid and the increase in energy prices. Central banks recommend that fiscal policy maintain selective support for the most vulnerable because there is room in fiscal policy to do so. I am very optimistic about Europe's responses to the latest crises. For the first time it knew how to react together, coordinating countries and policies. The fact that the European Commission is issuing common debt is a very big sign of solidarity and a historic advance in European integration.

Q. What will the shift you announced in a recent article consist of?

A. The Eurozone is an economy that does not grow with a labor market that beats positive historical highs. These two realities do not seem very compatible. At some point something is going to give way and you have to be prepared for that. We recovered from covid more quickly than we thought, which is why we grew so much in 2022 and suddenly stagnated due to other shocks. The turn is seen by these indicators. The economy has stopped, five quarters with hardly any growth, now we have to find the sources of growth in Europe's structural reasons, be it education, productivity or political or economic organisation. It is very difficult to look for exogenous sources of growth and that is the crossroads we must attend.

Q. The EU was strengthened during the pandemic, but there are signs of weakening that cohesion after the war.

A. It's the good part of living in a democracy. We are always challenging all balances. The dictatorships are very stable, but there is no doubt that we are in the most appropriate regime. We were wrong with some economic policy measures in the face of the financial and sovereign debt crisis, which led us down a path that made people tired of a policy that almost always made us feel guilty about something. This fatigue can also occur in the fight against climate change or the war in Ukraine, and it must be avoided. I hope that we can continue without fractures in Europe and that monetary policy will contribute to that.

Q. The current monetary policy has a terrible impact on mortgaged families. What can be done in countries like Spain and Portugal where variable mortgages are frequent?

A. The climb was very large, but perhaps the most difficult thing is the speed of the climb. In recent decades we had been at even higher interest rates, but this abrupt change leaves some families, especially if they have bought homes less time ago, in a more difficult situation. To react to this we always appeal to the capacity of pre-existing savings and an adjustment in the way households manage the budget, but we know that this is easier to raise if we know how the future will be. Expectation management is what we must also do with monetary policy to give predictability. And that is what we achieved on Thursday, a phrase that gives us predictability, a commitment that European households deserve. Then there is the public support that almost every country has.

Q. Efforts are called upon from families and governments. What efforts can be asked of a bank with great benefits?

A. Since we invented banking many centuries ago we ask these questions. They continue, and it is good that they are still with us.

Q. Banks receive public aid when things go wrong.

A. Public aid is another chapter on what for many years we did not do and did not do the banks to take care of their exposure to things that should not have happened. Banking in Portugal and Spain, due to the prevalence of variable interest rates on loans, had a difficult business model for years. When rates are very low, banks have difficulty generating results. This compression of the financial margin was supplanted with other businesses and sometimes commissions that are now being reduced because the financial margin with the highest rates is generating very large positive results.

Part of this is cyclical. Banks have to keep a substantial share of these profits because they may have to respond to the potential deterioration of lending, which we don't see today because the labor market is strong. The problem for banks is that their cycles have a correlation difficult for citizens to understand, because now we feel pressured and that is when banks are doing well. Before we were more relieved by interest rates and it was the time when the banks were less well. This is the time for banks to take care of their customers, to see if they have financial difficulties, if it is necessary for them to contribute capital to solve situations that are still residual.

Q. Is it time to move towards a greater European union?

A. That debate should be ongoing. There is now a very important window of opportunity with the European election cycle. It is time to return to issues such as the Community budget. We adopted it in 2019 and transformed it into the Next Generation EU, but the conditions must be created so that it can have a permanent European budgetary dimension.

Q. Can the rise of the far right put an end to this European integration?

A. These are political sensitivities that exist, you have to understand them all. The most extreme solutions are sometimes too simple and therefore attract more people than you might think. If we take the debate on European construction seriously, citizens would understand how important and complex these advances are and support for them would be greater, as it was in 2020.

Q. His latest article has been interpreted as meaning that the governor wants to stop being governor to return to politics. Is that so?

A. The governor has an obligation to explain himself so that people know what the person sitting on the ECB's board of governors is thinking about making momentous decisions. That is the point of that article. The future is always on tenterhooks.

Q. Would you be available if the Socialist Party encouraged you to stand for the succession of António Costa?

A. It's not a question that's in my head.

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