Governor of the Bank of Portugal says the fight against inflation will do more damage

The governor of the Bank of Portugal said this Tuesday that the fight against inflation will cause more harm to people, before interest rates fall, and regarding the political crisis he considered that “instability does not rhyme with growth”.

“Instability, whatever the source, does not rhyme with economic growth, [não rima] with social stability”, said Centeno at the CNN Portugal Summit, which took place in Porto, interviewed by Pedro Santos Guerreiro, and recalled that in the first decade of the 21st century there were three interrupted legislatures.

“If anyone thinks that the economic difficulties we faced over that time had nothing to do with this, let them be disappointed, because it did,” he said, adding that moments of political crisis are “normal institutional processes” in a democratic country.

Regarding the increase in interest rates, Centeno considered that the real interest rate (the difference between the nominal interest rate and inflation) is still expected to continue to rise in the coming months, which will worsen people’s difficulties. He also hinted that nominal interest rates should have already reached their maximum level but that they will remain that way for some time.

“The fight against inflation has done a lot of damage and will still do some because never before has the European Central Bank increased interest rates so much in such a short period of time,” he said. According to the governor, this rapid rise in interest rates did not allow economic agents to have “time to adjust”, which created extra difficulties. “That’s a concern I have and we should be measured in therapy,” he said.

Centeno also considered that Portugal and the Portuguese economy have made an important journey, highlighting financial stability (visible in indicators such as the reduction in the cost of debt and improvement in Portugal’s rating) and the increase in the population’s qualifications.

The former Minister of Finance in the governments of António Costa (PS) took his time, above all, in increasing qualifications in Portugal, stressing that at the beginning of the century only 40% of young people completed secondary education and today there are 85% (above the average of the euro zone and Germany), and considered that any “disturbance of this process will almost be a capitulation of economic growth in the medium term”.

Regarding whether Portugal retains young talent, when there is a lot of talk about youth emigration, Centeno said it has done so and that the country spent nine months analyzing INE figures that were wrong about the job market and “corrected the error” that was leaving “almost everyone on the psychoanalyst’s couch”.

“Where are our graduates? They are here. Since 2013 the number of graduates in the Portuguese population has increased from 1.3 million to 2.0 million. INE told us, until last week, that in the second quarter of this year there were fewer 180 graduates in Portugal, which was not true. According to the corrected version of the INE, the number of graduates will have increased by 71 thousand year-on-year”, says Centeno, who is an economist specializing in the labor market.

Centeno stated that this “silent revolution” is the “only source of sustainable growth” for an economy and that to be successful it takes “patience, because it takes work, and not to put obstacles in the way”, including companies. “We cannot raise the bar for companies that want to create jobs and employ these young people,” he said.

The ECB’s objective is to have inflation of 2% in the medium term, which is why, given the rise in inflation in the euro zone, it has decided to raise interest rates. When the ECB changes key interest rates, this is reflected throughout the economy, with some of the most visible aspects being the increase in bank loans, including housing credit.

Today, the president of the European Central Bank (ECB), Christine Lagarde, said in Berlin that given the size of interest rate increases so far, some time will be given to see their effect on the economy.

“Given the scale of our monetary tightening, we can now give it some time to develop,” said Lagarde when speaking about inflation and democracy, at an event organized by the German Ministry of Finance. Lagarde considered, however, that “it is not yet time to shout victory”, despite the decline in inflation in the euro zone.