(Bloomberg) -- The absence of a meaningful recovery and mounting risks to the economic outlook are a strong signal for the European Central Bank to consider steeper interest-rate cuts, Governing Council member Mario Centeno said.
Policymakers should remove all shackles from the euro-zone economy as quickly as possible to bolster spending and investment before rising unemployment will make a growth rebound harder to achieve, Centeno said in an interview in Washington.
He suggested that the prospect of inflation reaching the ECB’s 2% target at the end of the first quarter should help their resolve.
“We don’t need to restrict ourselves to a metric of moving only in quarter-point steps,” he said on the sidelines of the annual meetings of the International Monetary Fund. “For an economy that spent 10 years with average inflation of 0.9%, for an economy that is not investing, for an economy that is supported by a labor market that shows some signs of weakness, we need to consider the possibility of moving in bigger steps.”
The ECB stepped up the pace of policy loosening last week, when it lowered rates in response to weaker-than-expected inflation and growth momentum across the bloc. But most policymakers haven’t yet shown much appetite for increasing the size of reductions as well.
Economists predict 25 basis-point rate cuts at the next three meetings and another two steps by the end of next year. Financial markets are slightly more aggressive and have recently ramped up bets on a 50-basis point move in December.
“We keep postponing the recovery and downside risks are materializing,” said Centeno, who heads Portugal’s central bank and is one of the ECB’s most dovish officials. “This is probably a good definition of being behind the curve.”
He argued that the euro zone is at risk of falling into a vicious cycle in which the economy progressively deteriorates.
“The worst part is that the downside risks are all endogenous to policy,” he added. “We are risking that the economy and inflation will go down more than needed.”
President Christine Lagarde said last week that there are probably more downside than upside risks to the outlook for consumer prices, a diagnosis that some of her colleagues have since challenged. Austria’s Robert Holzmann said that he’s still concerned that inflation will prove stronger than expected.
“Of course there are downside risks as well — though I don’t see enough of them to conclude that they dominate,” he said in a separate interview. “I believe risks being tilted to the downside is still a minority view in the Governing Council.”
Centeno argued that the rebound in inflation that the ECB expects to see over the coming months will be weaker than thought and barely exceed 2%. Following that period, he sees price pressure staying below that level “for a long period of time.”
“We need to get to neutral as soon as possible,” he said. “Time is running out on this tension between the labor market delivering the highest employment and the highest wages ever, and an economy that hasn’t grown for nine quarters.”
He added that “whether or not we need to go below neutral, we don’t know yet.”
©2024 Bloomberg L.P.