MNI INTERVIEW:Pereira Says ECB Keeps Cool Head, Data Dependent

ECB Governing Council member Alvaro Santos Pereira told MNI Friday the monetary response to the Iran conflict will be based on incoming data and decided meeting by meeting, adding that the pre-Iran war inflation backdrop is tamer than it was before the Ukraine invasion

“At this stage we just need to see what will happen, in terms of the data. Keep our cool heads, and say OK, we’ve seen supply shocks before," he said in an interview during IMF meetings in Washington. “I have a view that right now, data dependent is the right way to go, meeting by meeting.”

“It’s a bit different from '22 because in '22 we had a significant demand shock, with some choke points and bottlenecks in certain parts of the world economy, freight rates were going up," Pereira said. "Inflation was already four or five percent in many European countries, before the invasion of Ukraine by Russia.”

The Middle East conflict's intensity and second-round price effects are being closely monitored, including a potential squeeze on natural gas Europe relies on for industry and winter heating, he said. (See: MNI INTERVIEW: Energy Strikes Risk Long Rebuild- Canada FinMin)

“We’ll be paying close attention to fertilizer prices, because in six to eight months, this will have implications for food prices,” he said. 

PAY ATTENTION, BE READY TO ACT

Shortages of helium from the Middle East could also slow the expansion of artificial intelligence, he said. 

“Those are variables that we will pay very close attention to, and then afterwards see whether inflation expectations remain anchored,” Pereira said.

Policymakers must "closely monitor first of all the conflict and see whether there is going to be a duration that is longer than expected, or if things get worse," he said.  "Afterwards you just need to see what the data tells us regarding the evolution. Then, I’m sure it will be a decision to act or not, but I think the most important thing is pay close attention to this data and be ready to act.”

Central bankers over a longer term may grapple with a widening productivity gap between the U.S. and other regions including Europe, Pereira said. “If we have a widening productivity gap, this will have significant implications for monetary policy in both countries, both regions.”

Pereira earned his doctoral degree from Canada's Simon Fraser University and praised that country's recent shift to removing internal trade barriers, improving infrastructure and diversifying trade partners in response to U.S. tariffs. 

“People are looking at Canada with respect and many with admiration, because basically Canada decided to roll up its sleeves and lead,” he said. “If Canada does (all) this I think this will help the Canadian economy immensely.” 

THE CENTURY MARK

At a global level, consumers and firms have faced recent shocks from Covid, the Ukraine war, tariffs and the Iran conflict, challenging central bankers also dealing with a rise in disinformation, he said.

“For many decades there was almost no inflation, and so people are not used to inflation,” he said. “It was a good lesson that central banks are essential to keep price stability, and that inflation should not be underestimated.” 

There are positive trends both from the major potential of AI to boost big parts of the economy and from improved public health, said Pereira. 

“One of the greatest revolutions that humankind is living through is longevity. Our kids have more than a 50% chance to get to 95 or 100,” Pereira said. “We have time not only to enjoy life a bit more, but also to contribute to society.”