Euro Zone Inflation: Central Bank Governors Diverge on Monetary Policy

Euro Zone Inflation: Central Bank Governors Diverge on Monetary Policy | Enterprise Wired

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Source – Reuters

Portugal’s Mario Centeno Expresses Confidence, While Austrian Counterpart Highlights New Risks

Positive Trajectory: Mario Centeno’s Perspective

Portugal’s central bank governor, Mario Centeno, expressed optimism on Tuesday about the trajectory of inflation in the euro zone, stating that it is moving in the right direction. Speaking at the World Economic Forum in Davos, Switzerland, Centeno emphasized the central bank’s focus on medium-term inflation rather than short-term fluctuations, stating that the current trajectory is very positive.

No Need for Overreaction: Maintaining a Balanced Approach

Centeno stressed that there is no need for overreaction, as the central bank aims to bring inflation in the medium term to the target of 2%. He highlighted the success of the European Central Bank (ECB) in anchoring expectations for inflation at this level, attributing it to the credibility of the bank. Despite remaining data-dependent, Centeno expressed confidence in the well-anchored forecast for inflation until 2025.

Domestic Pressures Easing: Impact on Inflation

Centeno acknowledged that the inflation pressures have become more domestic, with the shocks leading to the sharp rise in inflation in October 2022 subsiding. He noted that services inflation is falling faster than its ascent, indicating a positive trend in this sector.

Divergent Views: Robert Holzmann Flags New Risks

However, Centeno’s views stand in contrast to recent statements from Austrian central bank governor and ECB member Robert Holzmann. Holzmann indicated that recent data pointed in the “opposite direction” of what would typically prompt discussions about cutting interest rates. He also highlighted potential inflationary risks arising from volatility in the Middle East.

Surprises in Inflation Numbers: Timing of Rate Cuts Uncertain

Addressing the potential timing of rate cuts, Centeno admitted to being surprised by the downward trend in inflation numbers over the last three to four months. While acknowledging small forecasting errors, he interpreted the decline as a positive sign that tighter monetary policy is taking effect. He emphasized the need to remain open to data and make decisions based on a comprehensive assessment.

Challenges in a Shaky Euro Zone Economy: Joachim Nagel’s Perspective

Joachim Nagel, the chief of the German central bank, contributed to the conversation by stating that inflation is currently too high to warrant discussions of interest rate cuts. However, he suggested that summer might be an appropriate time for such considerations.

As the euro zone grapples with a stagnating economy over the past five quarters, the divergent perspectives of central bank governors reflect the challenges and uncertainties facing the region. While Centeno remains confident in the positive trajectory of inflation, others underscore the need to carefully monitor new risks and economic conditions.

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