ECB Policy will need to Respond to Slowing Inflation

The European Central Bank (ECB) may need to lower its interest rates in the coming months to support the inflation target of 2%, according to one of its policy makers. Mario Centeno, the governor of the Bank of Portugal and a member of the ECB’s Governing Council, said that the central bank will have to react to the slowing consumer-price growth in the euro area.

Speaking at the Warwick Economics Summit in the UK on Saturday, Centeno said that “if inflation is going down and it is coming down very fast — actually faster than it went up — monetary policy ought to respond to that.” He added that the ECB will “do our job in the next few months bringing stability also in this process and making sure that when interest rates need to go down, they will go down.”

The ECB raised its main interest rate to a record high of 4% in September 2023, after a series of hikes since July 2022, to combat the surge in inflation caused by the pandemic and supply shocks. However, inflation has started to ease in recent months, as the effects of the energy crisis and the reopening of the economy fade. The latest data showed that the headline inflation rate fell to 3.9% in January 2024, while the core inflation rate, which excludes volatile items such as food and energy, dropped to 1.9%.

Centeno also expressed his concern about the weak growth prospects of the euro area, which has been hit by the Omicron variant of the coronavirus and the geopolitical tensions with Russia. He said that the region has not grown for five quarters and may face another contraction in the first quarter of 2024. He urged for more fiscal and structural reforms to boost the potential output and competitiveness of the euro area.

Centeno’s comments echoed those of other ECB officials, who have signaled their openness to easing monetary policy this year. Frank Elderson, an executive board member of the ECB, said in an interview published on Saturday that the central bank is “making good progress” on inflation and that it will “act if needed” to ensure price stability. Isabel Schnabel, another executive board member, said last week that the ECB will “not hesitate” to cut rates if inflation falls below the target.