Monday, August 15, 2022

ECB’s Centeno Can’t Rule Out Stagflation After Russian Attack

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The euro zone could be vulnerable to stagflation in the wake of the Russian attack on Ukraine, according to European Central Bank Governing Council member Mario Centeno.

The Portuguese governor, speaking in an interview in Lisbon on Monday, said he favors continuing the monetary policy “normalization” flagged by officials in recent weeks, though he acknowledged that the conflict could yet impact how that materializes. 

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“I am convinced that the traction of growth that the economy was following will prevail,” Centeno said. Still, “a scenario close to stagflation is not out of the possibilities that we can face. So we need to adjust our policies to that.” 

The governor, a former Portuguese finance minister who used to lead meetings of his euro-region counterparts, spoke as the ECB prepares for a major decision on March 10. Policy makers have been preparing to wind down bond purchases in the face of record inflation, a task now complicated by the economic impacts of war and sanctions.

Centeno said that officials had already previously considered the threat of stagflation during the coronavirus crisis, and he wondered aloud how such a scenario could now take form. 

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“After the invasion these risks have only increased,” he said, citing the possible outcome of “a positive impact on inflation, a few decimal points, and a negative impact on growth.”

On Friday, President Christine Lagarde promised the ECB will “take whatever action necessary” to ensure price stability and financial stability in the currency bloc. The region is particularly exposed to the conflict due to its economy’s reliance on Russian energy imports.

Centeno said that a shutoff of gas would be a “worst scenario,” and flagged the ECB’s ability to support markets with liquidity if required. 

Stability Readiness

“The most important thing right now is for us to be ready and available to preserve financial stability,” he added. 

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Centeno said that the ECB will be “open minded” at next week’s meeting. He cautioned however that “normalization” of monetary policy is not only necessary but also “it is very much welcome.” 

The governor’s insistence that the central bank can proceed with stimulus withdrawal chimes with recent comments from some of his colleagues last week. They expressed optimism that the war in Ukraine may slow down but not stop such a policy shift. 

Austrian Governor Robert Holzmann told Bloomberg that the central bank is moving toward normalization, though action might now be “somewhat delayed.” His Irish colleague, Gabriel Makhlouf, said on Wednesday, the day before Russia’s attack, that he expected a decision on bond buying would still be possible in March.

By contrast, Greek Governor Yannis Stournaras told Reuters that he thinks asset purchases should be extended at least through the end of this year to cushion fallout from the conflict.

©2022 Bloomberg L.P.

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