ECB’s Centeno sees conditions to reverse rate cycle ‘in the near future’

By Sergio Goncalves

LISBON (Reuters) – European Central Bank policymaker Mario Centeno said on Wednesday he expected macroeconomic conditions would lead to a reversal in the bank’s recent cycle of rate hikes in the near future.

The ECB, which left its deposit rate unchanged at 4% last month, sees inflation falling back to its 2% target in late 2025, with consumer price growth broadly stagnating at around 3% for most of 2024.

“Monetary policy has contributed to the decline in inflation being effective, sustainable and rapid,” he told a news conference following the release of a new stability report by the Bank of Portugal, which he heads.

“We are in a cycle of (rising) interest rates which was very intense; it was a significant tightening of financial conditions, but it is expected that there will be conditions, in the near future, to reverse rather than continue (this cycle),” Centeno added.

The ECB has lifted rates by a combined 4.5 percentage points since July 2022 to combat runaway price growth, but promised a pause as record-high borrowing costs are starting to work their way through the economy.

Centeno said the ECB should “maintain current rates until all signs of falling inflation are consistent with convergence towards the 2% target”.

“In recent weeks, there has been a reinforcement of the anchoring of expectations that inflation is converging towards the 2% target,” he said, though he also warned about the need for caution.

According to the policymaker, the convergence of inflation should occur over the next few months until 2025, with the final phase occurring at a slower pace.

Centeno warned that even as the ECB’s nominal interest rates could now remain stable due to declining inflation, real interest rates that directly impact companies, households and economies were still expected to increase.

“In fact, the financial squeeze will continue for some time, even if nominal interest rates remain constant,” he said.