Maintaining interest rates at their current levels will be “decisive” in lowering inflation, according to Bank of Portugal governor Mário Centeno. 

During an interview with El Pais, following the European Central Bank’s (ECB) decision to increase its three key interest rates by 25 basis points, Centeno stated: “We think that if we keep them [the European Central Bank’s interest rates] at this level, we’ll do something decisive so that inflation can converge towards 2%, which is our goal. The most important thing at the moment was to provide some predictability so that we can adapt to what awaits us in the coming months.”

The governor added that the “risk of doing too much is always present in monetary policy,” as we saw in 2008 and 2011 when the ECB “had to go backwards because raising interest rates was not compatible with price, financial and economic stability. This risk is real, and we must be vigilant,” he said.

Furthermore, when questioned if he was in favour of the ECB ending its rate hiking cycle now, Centeno commented: “We can’t deviate from this path because inflation is more regressive and socially unjust than the measures we use to combat it, which are often harsh and harm the economy.

“The problem is that so is inflation. In the governing council [of the ECB], we try to manage this difficult balance,” he continued.

The Bank of Portugal governor also said that “the key to continuing to lower inflation and resist rising interest rates is the labour market, which is at historic highs” in Europe. It’s almost an obligation of all policies, including monetary policies, to protect this new ‘status quo’, which keeps us away from the stigma of stagflation,” he said.

Furthermore, Euractiv reports Centeno said that in order to avoid “large increases in unemployment and social problems, predictability and coordination of policies” is required, whilst acknowledging the situation is not the same in all EU nations.

“Monetary policy is unique, although we know its impact is different. For that, there’s fiscal policy, and that’s what we achieved during Covid and the rise in energy prices,” he said, adding that central banks recommend that “fiscal policy should maintain selective support for the most vulnerable because there’s room in fiscal policy to do so,” the governor stated.