Vitor Constancio is a former vice president of the European Central Bank having served in that role from 2010 to 2018 alongside three ECB presidents. First, Jean Claude Trichet, second Mario Draghi, and lastly Christine Lagarde. He served as Governor of the Central Bank of Portugal, and a deputy governor as well. In other words he is a seasoned and respected central banker - just the kind of person to talk with when not only the ECB but also central banks around the world have started cutting interest rates.
The ECB did cut its key rate by 25 bps today as widely expected. According to Vitor, as well as the ECB, inflation has come down sufficiently from is peak to cut the rate for the second time this year, following on the heels of the first cut it in this cycle in July. And even inflation is still far from its 2% target, Constancio and many others expect it to continue on its downward path as the services prices lose some of their upward steam, wages as forecast by the ECB and grow more slowly, and as euro-area growth slows, led by nations like Germany and the Netherlands both of them in recession.
Vitor expects inflation to fall even lower and faster than the ECB…”By the summer of next year, and not, as the ECB has said, by the end of next year. So all these indications, the numbers I mentioned and the trends I mentioned about energy and so on, lead me to conclude that indeed it will be a little quicker than the ECB is expecting.”
He is also keeping his eye on global forces when it comes to the euro-economy, and the path of inflation. The slowdown in China is hitting Euro-area manufacturers like Germany who sell so much of their output there.
As for the invasion of Ukraine by Russia, while it isn’t “right now having a significant impact on growth in Europe,” Vitor does see the war as “a cloud over Europe in terms of geopolitics.”
The U.S. also poses some risks to EU growth.
”There is concern that the United States is also decelerating, still strong, particularly the second quarter with 3 .1 year -on -year growth (which) was indeed quite significant when it's compared it with the 0 .6 of the euro area,” he says.
“Still, I don't see… a recession in the horizon for the US, but certainly a weakening, which will continue,” he adds. “And that one day will also affect the stock market in the U.S. which has been, I think, overstretched. And so that expected correction will affect animal spirits, and that will contribute, of course, to the deceleration, which is now widely expected for next year. That also will have an impact on Europe.”
“So this is indeed the cause of concern,” Vitor adds. “And that's why, by the way, the central banks are now starting to cut rates.”
Which leads me to ask him, how important Fed rate cuts will be globally? Here’s his powerful and resonating answer.
”It’s important because the Fed, the United States…is the financial and monetary cycle of the world economy,” Vitor says. “It’s still that. And so it has a lot of spillovers to many other countries.”
“It does not mean necessarily that other central banks in the world have to follow immediately the Fed, many do and indeed the spillovers are very significant and it affects the overall economy also by the transmission to the exchange rate of the dollar which has a very significant impact on world trade"” Vitor explains. “It is well documented historically so indeed everyone looks to the Fed to see what will happen.”
“So it's important that the Fed starts cutting and I think they will because now what Chairman Powell said in Jackson Hole… and very significant is their concern with what may happen to unemployment and the unbalance on the other direction of the labor market,” he adds.
We covered a lot more ground as Vitor explained some key differences between the way the ECB and the Fed assess inflation pressures - or lack of same. Would you like to get a better sense of how the ECB operates compared with the Fed?
One more reason dive in and hear, see, what the former vice-president of the ECB has to say.
Vítor Constâncio was Vice-President of the European Central Bank from 1 June 2010 to May 2018. In the Portuguese Government, he was Secretary of State for the Budget and Planning in 1974 -76 and Finance Minister in 1977-78. At the central bank of Portugal, he was Director of the Economics Department, Deputy Governor and then from 2000 to 2010, Governor of the Banco de Portugal and consequently, member of the European Central Bank Governing Council.
He was Assistant Professor at the Lisbon School of Economics and Management (ISEG), University of Lisbon, from 1968 to 1973 and later, coordinator Professor of the Master´s degree on Monetary Policy from 1989 to June 2010. He is now President of the School Board at ISEG and Professor at the Master's Degree in Banking and Financial Regulation at the School of Economics, University of Navarra, Madrid, and member of the respective Advisory Board.
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