Vitor Constancio has steered monetary policy in Europe through many episodes. He was vice-president of the European Central Bank from 2010 to 2018, serving alongside three ECB presidents: Jean Claude Trichet, Mario Draghi, and Christine Lagarde. He also served as Governor of the Central Bank of Portugal, and a deputy governor as well. In other words, he’s been there done that.
Now in the post-pandemic era of easing inflation, concerns about weakening European growth and how policies of about the incoming Trump Administration could exacerbate this, he is a strong advocate of the ECB continuing on its rate cut path with another 25bps move in January and “several more” after that if the incoming data support this - as he is certain it will.
”I would say that the policy rate is coming down to 2% or a number around 2%. It can be slightly below <that> if inflation goes very weak, down to around two (percent)… and it's now at three,” Vitor says. (Timeline 00:17:03:02)
“So it means that,,, we will still have two more cuts,” he adds. “No, sorry --several cuts of 25 basis points to get there in this baseline scenario that is my baseline scenario,” Vitor was looking for a 50bps rate cut ahead of the ECB’s December meeting and was disappointed the majority opted for the 25bps reduction to 3%. Will the Governing Council opt for more aggressive move at its January meeting?” I don't believe that the ECB will do 50 basis points at one particular meeting because the situation is so uncertain.”
Vitor also shared with thoughts on very important and interesting issues.
Trump’s Drill Baby Drill Could Bring Down EU Inflation 00:08:33:22
There is another point about the inflation, which is important, that has not been as commented on as I think it deserves, which is that, whereas in general the announced policies of the new U.S. administration are for the US are on the inflationary side… nevertheless one of them which goes against that, comes from that well-known sentence that is drill, baby, drill, baby, drill.
So energy, which is a big issue for Europe. International factor for Europe, which is a big importer of energy, as you know, if indeed that U.S. policy will lead to further and significant declines both in the price of oil and gas, that will be very helpful for inflation in Europe in particular as we are being importers of energy.
Weak EU Growth Driven Mainly by Germany to Drive Further Rate Cuts 00:05:48:24
And while others looking forward, as monetary policy should do, looking forward and in view of the weakness of the economy, expect further declines…inflation as I do and <those on the ECB <who> were in favor of 50. <basis point cut> …All indications are that the fourth quarter growth will be below what it was in the Q3 and for the whole year it will be around 0.6%.
So really quite weak, mostly because of Germany, which is practically zero growth this year. And we have at at the same time, <we have> a political situation in Europe where the two main countries, France and Germany, are in sort of a political crisis, or rather in Germany. They are waiting now for the elections that no one knows if any one will bear the majority in those elections.
So dive in, have a look and a listen at what Vitor says about all of this and more. His analysis paints a picture of an ECB that still has some ways to go on its rate cut path.
Vitor Constancio
former Vice-President at European Central Bank, Professor at University of Navarra
Distinguished Fellow
https://www.iseg.ulisboa.pt/aquila/cursos/emf/vitor-constancio?locale=en
Vítor Constâncio is a professor at the School of Economics & Business Administration of the University of Navarra. From June 2010 to May 2018, he served as Vice-President of the European Central Bank. He was Governor of the Banco de Portugal from 1985 to 1986 and from February 2000 to May 2010. He graduated in Economics from the Universidade Técnica de Lisboa. Before having been appointed as Governor of the Banco de Portugal, he was Executive Director of the Banco Português de Investimento (1995-2000) and Non-Executive Director of the Electricidade de Portugal (EDP), the Portuguese national power utility (1998-2000). He was Invited Senior Professor of Economics at the Instituto Superior de Economia e Gestão from 1989 to June 2010, culminating a long academic career.
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