The central bank must be even more conservative

LONDON – The European Central Bank must be “even more conservative” in its response to inflation in order to avoid repeating the mistakes of the past, Mario Centeno, member of the Governing Council, told CNBC.

The central bank is currently under some pressure as consumer prices have skyrocketed in recent months. Eurozone inflation hit a 10-year high in August, standing at 3% from a year ago.

Rising inflation usually requires a tighter monetary policy, but the ECB has so far insisted that price increases are temporary and that it is not yet time to reduce its stimulus measures in pandemic period.

“We’ve been fooled by inflation news in the past which has made us act in the wrong way, so we certainly don’t want to make the same kind of mistakes this time around,” said Centeno, who is the governor. from the central bank of Portugal, said Monday.

The ECB shocked the markets when it chose to raise interest rates in 2011, as the sovereign debt crisis swept across the bloc. At the time, then-president Jean-Claude Trichet defended the decision citing higher inflation figures, but critics described it as a tipping point for the eurozone – and not in the right direction.

“We must guarantee favorable financing conditions for all sectors of our economy upon exiting [the] crisis and we are not there yet, we are not out of the woods yet, “said Centeno, defending the central bank’s current lax monetary policy.

The central bank created a new bond buying program in March 2020 to support the 19-member bloc throughout the pandemic. This program, known as PEPP, is currently expected to last until March 2022 and total up to 1.85 trillion euros ($ 2.2 trillion).

At a meeting earlier this month, the ECB decided to slow the pace of purchases, but ECB President Lagarde said it was not a decrease – just a recalibration .

“We have to be very – I would say even more – conservative in the way we approach this problem,” he added.

Speaking to CNBC last week, ECB President Christine Lagarde said inflation is expected to return to more stable conditions next year, “because most of the causes of the price hike are temporary” .

These include higher energy prices and bottlenecks in supply chains.

Earlier this month, the ECB estimated an inflation rate of 2.2% at the end of the year. This number is then expected to drop to 1.7% and 1.5%, respectively in 2022 and 2023. Revised forecasts are expected in December.

But some experts have questioned whether certain inflationary pressures are here to stay.

Speaking with CNBC, Centeno reiterated that, so far, inflation is not where the ECB wants it to be before reducing stimulus measures.

“We are already seeing something happening on this front, but when we look at our projection horizon, inflation is not yet anchored at 2%,” he said, adding that accordingly the ECB must continue with its set of measures.