ECB’s Centeno can’t rule out stagflation amid Russia attack

Bloomberg

The euro zone could be vulnerable to stagflation in the wake of the Russian attack on Ukraine, according to European Central Bank Governing Council member Mario Centeno.
The Portuguese governor, speaking in an interview in Lisbon on Monday, said he favours continuing the monetary policy “normalization” flagged by officials in recent weeks, though he acknowledged that the conflict could yet impact how that materializes.
“I am convinced that the traction of growth that the economy was following will prevail,” Centeno said. Still, “a scenario close to stagflation is not out of the possibilities that we can face. So we need to adjust our policies to that.”
The governor, a former Portuguese finance minister who used to lead meetings of his euro-region counterparts, spoke as the ECB prepares for a major decision on March 10. Policy makers have been preparing to wind down bond purchases in the face of record inflation, a task now complicated by the economic impacts of war and sanctions.
Centeno said that officials had already previously considered the threat of stagflation during the coronavirus crisis, and he wondered aloud how such a scenario could now take form.
“After the invasion these risks have only increased,” he said, citing the possible outcome of “a positive impact on inflation, a few decimal points, and a negative impact on growth.”
On Friday, President Christine Lagarde promised the ECB will “take whatever action necessary” to ensure price stability and financial stability. The region is particularly exposed to the conflict due to its economy’s reliance on Russian energy imports.
Lagarde canceled a scheduled appearance on Monday, but her Executive Board colleague Fabio Panetta did deliver a speech echoing that view, adding that current circumstances suggest a need for greater caution in shifting the ECB’s monetary stance.
“We should adjust policy carefully and recalibrate it as we see the effects of our decisions, so as to avoid suffocating the recovery,” he said. “This terrible event has made the need for prudence even greater. The world has become darker, and our steps should be smaller still.”
Centeno said that a shutoff of gas would be a “worst scenario,” and flagged the ECB’s ability to support markets with liquidity if required.
“The most important thing right now is for us to be ready and available to preserve financial stability,” he added.
Centeno suggested that the danger of an inflationary spiral taking hold in the euro zone through wage increases isn’t yet apparent and may even be diminished.
“There are good reasons to think that second-round effects are still far from us, and not yet a concern for monetary policy,” he said. “This new crisis, the Ukraine crisis, will delay this even further for sure.”