European Central Bank (ECB) Governing Council member Mario Centeno has indicated that the lack of a meaningful recovery and the increasing risks to the economic outlook are strong signals for the ECB to consider more significant rate cuts.
In an interview in Washington, Centeno stated that policymakers should remove all shackles on the eurozone economy as soon as possible to boost spending and investment, in order to prevent rising unemployment from making it more difficult for economic growth to rebound.
He mentioned that the prospect of inflation reaching the ECB's 2% target by the end of the first quarter should help them make up their minds.
Speaking on the sidelines of the International Monetary Fund (IMF) annual meeting, he said: "We do not need to confine ourselves to acting in increments of 25 basis points. For an economy with a 10-year average inflation rate of 0.9%, an economy without investment, and an economy supported by the labor market, we need to consider the possibility of taking more substantial measures."
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Last week, the ECB accelerated the pace of policy easing by cutting rates to address the lower-than-expected inflation and growth momentum across the eurozone. However, most policymakers have not yet shown a willingness to increase the scale of rate cuts.
Economists predict that there will be a 25 basis point rate cut in the next three meetings, with two more cuts expected by the end of next year. Financial markets, on the other hand, have been slightly more aggressive, recently increasing bets on a 50 basis point rate cut in December.
Centeno, the governor of the Bank of Portugal and one of the ECB's most dovish officials, said: "We have been delaying the recovery, and downside risks are emerging. This could be a good definition of being behind the curve."
He believes that the eurozone faces the risk of falling into a vicious cycle of economic deterioration.
He added: "The worst part is that the downside risks are all policy-induced. The risk we face is that the decline in the economy and inflation will exceed what is needed."
ECB President Christine Lagarde noted last week that the downside risks to the consumer price outlook may be greater than the upside risks, but some of her colleagues have questioned this. Austrian central bank governor Robert Holzmann said he remains concerned that inflation could be stronger than expected.In another interview, he said: "Of course, there are also downside risks—although I haven't seen enough downside risks to conclude that this risk is dominant. I believe that in the Management Committee, the view that tends towards downside risks is still a minority opinion."
Centeno believes that the European Central Bank expects inflation to rebound weaker than expected in the coming months, hardly exceeding 2%. After that, he thinks price pressures will remain below that level "for a long time."
He said: "Our (policy) needs to reach neutrality as soon as possible. The labor market provides the highest employment rate and the highest wages in history, and the economy has not grown for nine quarters; there is not much time left for this tension."
He finally added, "Whether we need to be below the neutral level, we don't know yet."