MNI INTERVIEW: Solid Q2 To Back 1 More Cut- ECB's Centeno

Market expectations for just one more cut in interest rates this year which formed the basis of the European Central Bank’s June projections could turn out to be accurate if Q2 economic data is solid, confirming that inflation is around 2% and that the European economy is not slowing down, Bank of Portugal Governor Mario Centeno told MNI.

“If that materialises, we can be more confident that inflation can remain at 2% because my view on that is always that we need an economy that is compatible with inflation at 2%. And if this pickup in growth is confirmed, this is good news,” Centeno said in an interview at the ECB’s meeting in Sintra, Portugal, noting that data would need to confirm the good trajectory seen in the first quarter.

If this scenario materialises, it would be “the next big success” for the ECB and productivity growth will start to be more visible, Centeno said. The rate path underpinning June’s projections implied just one more cut this year to the 2% deposit rate.

However, the Portuguese central bank chief said the fundamentals of the European economy have not changed much with respect to the pre-pandemic era, and there is the risk that these fundamentals mean a return to sub-target inflation.

“So even with the economy not doing that bad [in 2019], inflation was not moving away from 1% average. So that’s a risk that it is always there,” he said.

First-quarter strength could be a result of anticipation of exports because of tariffs, so the ECB needs to see if this solid performance is confirmed also in Q2, Centeno said, adding that the end of the NextGenerationEU loan scheme will remove one support for growth, while other big potential drivers, such as German defence investment, may or may not materialise.

“The dynamics of public investment may be postponed, mostly related to the NextGeneration yield. And that will have an impact on the dynamics of the economy,” he said. “We keep revising downwards our projections for public investment and public expenditure.” (See MNI ECB WATCH: ECB Cuts 25BP, Nears End Of Cycle)

ASSESSMENT REVIEW

The perception that the ECB was late in reacting to the inflation surge in 2022 will probably make policymakers more cautious, Centeno said, noting that the assessment of its strategy review just released recommended paying more attention to deviations from the inflation target in either direction.

Asked whether a further appreciation of the euro against the U.S. dollar could pose a downside risk to inflation, Centeno acknowledged the effects on prices but said that as long as it correctly reflects market correlations, it should not worry the ECB.