Mário Centeno: Introductory statement at the Conference of the
Governors of Mediterranean Central Banks
Introductory statement by Mr Mário Centeno, Governor of the Banco de Portugal, at the
Conference of the Governors of Mediterranean Central Banks - Central Banks at the Frontline of
the Covid-19 crisis, 28 June 2021.
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Thank you for the invitation and let me congratulate you for the Conference of the Governors of
Mediterranean Central Banks.
The policy response to COVID was unique and distinct: domestic, regional and global layers
were involved.
International cooperation has been crucial in responding to the health emergency and the
challenges of the vaccination process, in defending global financial stability and in addressing the
most acute needs of the most affected countries, very often those with less room to implement
countercyclical policies.
We are not yet out of the woods. We must put forward all efforts to bring the vaccination to all
citizens, worldwide, and to help with the recovery of the most affected sectors in our economies.
Concerted action in fiscal and monetary policies has been a significant development in multiple
geographies, a trend that is expected to continue during the recovery phase. Within their specific
mandates, fiscal authorities, supervisors and central banks can and should explore their
strategic complementarities.
The European Union is an excellent example: a consistent multipronged approach was also a
significant step towards strengthening integration - long-standing constraints and no-go zones
were overthrown. If maintained, this vision will make Europe a more robust and effective
economic and monetary area, a more significant global player. This has myriad implications, not
least for its citizens and neighbouring countries.
Monetary policy in the euro area reacted in a timely and effective manner, in line with the ECB
mandate to preserve price stability, seeking to ensure the flow of credit to the economy and
favourable financing conditions to all sectors and avoiding fragmentation of financial markets.
Micro- and macroprudential policies - and many of our central banks are supervisory authorities
- were also instrumental in managing the delicate balance between measures to support the
economy, including both firms and households, and preventing risks from accumulating on the
balance sheet of financial institutions. Measures included risk management, including credit and
operational risks, reporting and governance, regulatory and capital requirements.
Readiness to face a range of scenarios and close monitoring of banks and risks were key.
These dimensions should be kept going forward.
The timing for removing or alleviating the implemented measures will require a cautious and
vigilant approach, carefully tailored to the progress of economic and financial developments. All is
still highly constrained by the evolution of the pandemic.
We are in recovery mode now.
We are now entering a new stage and we must adapt existing measures. Above all, we must
use the lessons learned with the joint action to face the COVID global challenge to be prepared to
similar challenges in the future. Some, like climate, are already on the making, so we need to
build a new framework, capable of moving our economies, financial systems and societies
forward.
This means addressing two main legacies of this crisis: scarring and global uncertainty.
Monetary and fiscal policies must play an important role helping the recovery. Monetary policy
should remain accommodative to help preserve favourable financing conditions until the recovery
is on firmer ground.
In the euro area, there is room for monetary policy to keep a steady hand and avoid any
unwarranted tightening of broader financial conditions driven by spillovers from a faster recovery
elsewhere.
Extending fiscal support flexibly, as done by many countries until now, is also possible and
adequate. Once the recovery is on firmer ground, the withdrawal of policy support should be
gradual and contingent on the state of the economy. Sustained signs of durable inflationary
pressures and improvements in labour markets should guide monetary policy normalisation. As
for fiscal policy, it is important to strike the right balance between the consolidation of public
finances and support for an efficient reallocation of resources to viable companies.
In January 2020, the ECB launched its monetary policy strategy review. It came with a promise:
"we will leave no stone unturned". We cannot miss this opportunity. Every workstream of this
review is important. Having price stability at the top we need to understand the interlinks with
other policies of the Union; the role of financial stability and payment systems; how agents,
markets and technology impact the transmission mechanism of monetary policy, and, of course,
climate change and digitalisation.
This means huge amounts of data and technology to support increasingly complex analyses.
Without them, decision-making is erratic and dangerous.
Besides monetary policy and reserve management, macro- and microprudential policies, central
banks are benchmarks and role models for firms and private citizens. Banco de Portugal takes
this dimension very seriously.
The acceleration towards digital approaches raises major challenges for monetary policy,
beyond its meaning for Europe's payment ecosystem, including payment regulators and
supervisors. To safeguard monetary and financial stability authorities need to make sure that this
new era matches public expectations and needs. A fast digital transition reinforces the need for
the central bank to be prepared to respond to emerging challenges. As for the possible central
bank digital currency, design features will be crucial to preserve financial stability as well as
banks' intermediation, while supporting our economic, financial and strategic interests.
Central banks are not the only game in town. Fiscal and structural policies are at least as
important. I will not address those, but simply say that, in Europe, Next Generation EU is a key
instrument and it much more than a mere fiscal instrument.
Multilateralism is back
The global recovery will only be as strong as that of the most vulnerable countries. From our own
experience, we know that a country's problems may quickly become regional, gaining scale from
there.
This is the moment to promote cooperative solutions and an open and rules-based multilateral
system. International financial institutions and their entire set of tools for analysis, advice and
empowerment will once again be a central element in this recovery process.
One of the lessons learned from this pandemic is certainly the irreplaceable role of
multilateralism and international cooperation in containing the main risks and overcoming global
crises. This clear notion and consistent action enabled a response from truly global public
policies. Such policies should support countries' return to sustainable and inclusive growth,
creating jobs and opportunities for young people, and fostering global financial stability.
At a multilateral level, a good example of this collective effort towards supporting the recovery is
the new $650 billion allocation of the IMF's Special Drawing Rights (SDRs). This general
allocation should help boost global reserves while providing space for necessary fiscal
expenditures to exit the pandemic crisis and enable more sustainable recoveries. It will also
provide much-needed liquidity to the most vulnerable. Portugal supports this effort and is ready to
play its part.
Specific challenges may arise in the near future, especially for developing and middle-income
countries, amidst the need to finance a resilient recovery and tackle structural vulnerabilities in a
context of uncertainty, increasing financing pressures and eroded policy space.
There is growing recognition that capital flow dynamics have changed significantly over the last
decades and that countries may need more flexibility to address financial stability risks.
Sound domestic macroeconomic frameworks are essential to protect against excessive capital
volatility. While they are no substitute for necessary macroeconomic adjustment, capital flow
management measures, in situations where capital flows pose financial stability risks, may be
warranted as part of a broader approach to protect the financial system. A holistic view on policy
options and instruments is warranted here too.
To conclude
A clear mandate and an independent central bank do not mean that we do not look ahead and
look around.
Overcoming this crisis is no one-man or one-institution job. We are trying to recover what we
lost, but we are trying to do it better this time, and this means building a fair and inclusive
recovery within our countries and between our countries.
Central banks are key to successfully accomplishing this difficult but not impossible goal. Blind
decisions that ignore the new broad and interdependent context are bound to fail.
There are no minor banks, financial systems or minor risks for that matter. If the pandemic
taught us anything, it is to pay attention to operational risks. Operational resilience kept us going.
Moving forward, we depend upon the operational resilience of banks, processes, technologies
and on the resilience of our own staff. As we faced eminent collapse, we realised how
operational risk was as important as financial risk, and our safety was as important as our
neighbours'.