Inflation in Portugal not caused by sovereign debt worries

 In Bank of Portugal, ECB, News

It was not “imprudent” for the European Central Bank to raise interest rate by 0.5% now rather than last year, according to Vítor Constâncio, the former governor of the Bank of Portugal and ex vice-president of the ECB.

Neither was Portugal’s public debt – the third highest in Europe, nor the end of the ECB bond buying policy behind galloping inflation.
Speaking to RTP on Thursday on the issue of rising inflation and current measures to curb it, the ex vice-president of the ECB said he didn’t believe it had been necessary. “Until August 2021 inflation was below 3%, which was almost within the 2% limits defined by the ECB”.
“In August it appeared that inflation had not yet begun to rise to other amounts. Inflation only began to rise above 3% in the Euro Zone towards the end of the year with 4% in October” he said.
The ECB increased its interest rates to 0.5% this week in what was the first increase of any kind since 2011.
“For the first time it became obvious for most people that we would have to enter a cycle of increased interest rates. It began in the United States and other countries like the United Kingdom”, said Constâncio.
And explained: “Any variation in the interest rate is going to have an affect on the economy. All of this inflation came from international ‘shocks’ in prices of oil and foodstuffs which caused the inflation”.
Constâncio pointed out that between 2008-2017 the increase in speculative pressures on the central banks (Sovereign Debt Crisis) and subsequent interventions (Bond Purchasing Programme) was enormous, and yet it hadn’t caused inflation for all those years.
“Inflation happened because these shocks in the primary food and energy markets which worsened this year (because of the War in Ukraine) were reflected in price increases.
Vítor Constâncio emphasised that EU financial policy had been a lot less expansionist than in the US where, on the whole, salary increases had been a lot higher than in Europe.
“The EU’s monetary policy has to try and mitigate these domestic increases in prices on the back of (food and energy) inflation”.
The former governor of the Bank of Portugal said that the 0.5% ECB interest rates would have an impact on the cost of Portugal’s financing needs for new sovereign bond issues. The interest on fresh issues of 10-year bonds is now at 2.4%. However, he said: “The average maturity on Portugal’s debt (bond issues) is around 7 years and there is a stock of older bonds which were negotiated at the former and cheaper rates, so the new rates will only affect the total bond stock years from now”.