mario centeno : policy mix of the future - the role of monetary, fiscal and macroprudential policies keynote intervention by mr mario centeno, governor of the banco de portugal, at the international conference " future of central banking " organised by the bank of lithuania and the bank for international settlements on the occasion of the centenary of the bank of lithuania, vilnius, 29 september 2022. * * * good morning. let me start by explaining why i consider that the coordination between monetary and fiscal policy is fundamental for the european union to overtake the challenges of the current uncertain economic context. afterwards, i will also address the role of macroprudencial policy. monetary policy gathered credibility over the past 40 years centred on the independence of central banks and on a strong commitment to price stability. the monetary dominance paradigm is a cornerstone of the institutional framework that supports this credibility. and it plays an important role in the current high inflation setting. monetary policy must act to ensure that inflation expectations remain anchored, whereas fiscal policy must be bound to public debt sustainability. however, as claimed by central bankers over the last decades, the recent pandemic experience has shown how monetary and fiscal policies can coordinate in many circumstances, and mutually reinforce each other. notice that the low inflation, low interest rate environment that prevailed for over a decade, favoured strategic complementarities between monetary and fiscal policy towards macroeconomic stabilisation. in that environment, fiscal policy faced a less steep trade - off between public debt sustainability and stimulating demand. however, the pandemic legacy adds importance to debt sustainability. at the end of 2021, the euro area debt ratio was still 12 pp above the 2019 level. currently, as we move away from the zero - interest rate environment, rising debt servicing costs are becoming again a concern, in particular for high - debt countries. in the high inflation scenario, the trade - off between debt sustainability and macroeconomic stabilisation is stronger, especially as inflation outcomes are mainly driven by supply factors. monetary policy is more effective when inflation is demand driven ; fiscal policy has the tools to address specific supply shocks as we face today. monetary policy also faces a challenging choice between a more gradual increase of the policy rate, which takes into account the high uncertainty and its effects on the real economy, and a stronger response that tames the risks of inflation remaining noticeably above the objective for a protracted period. 1 / 4 bis - central bankers'speeches a faster than warranted increase in policy rates may

the reform of eu fiscal rules and the enactment of the budgetary instrument for convergence and competitiveness, approved in december 2019 as the embryo of an euro area common fiscal capacity, could be the next steps forward to avoid these constraints. they will reduce the risks of fragmentation, alleviating the pressure on monetary policy, and moving towards a sounder interaction between policies. 2 / 4 bis - central bankers'speeches it is always important to recall that the first time the euro support among europeans increased in the context of a crisis was in 2020. and this was no coincidence, it was a clear understanding by our fellow citizens that for the first time ever in a crisis we were acting as a union. a union with a purpose, a union in which people could understand the continuity across policies, both across each country and the eu, but also across the different economic policy domains. and that includes macroprudential policy. because monetary policy effectiveness also depends on an increasingly important role of macroprudential policy. the scope for interaction between these policies is large, as they share common transmission mechanisms and can affect each other's objectives. the ecb's review of the monetary policy strategy recognized that financial stability is a precondition for price stability. macroprudential policy should be the first line of defence against financial stability risks, notably in a monetary union where financial cycles are not fully synchronized. monetary policy is too " blunt " to deal with financial stability effectively. the relevance of the interactions between monetary and macroprudential policies cannot be played down. monetary policy decisions affect the credit granted to the economy and, therefore, can spur " side effects " – positive or negative – on financial stability. on the other side, macroprudential policies, while containing financial stability risks, may reduce the length and the magnitude of economic expansions by inhibiting credit to finance productive economic activities. the arguments for using monetary policy to explicitly and automatically deal with the build - up of risks are weak. leaning against the wind may not be desirable as a general principle, even if keeping flexibility may be warranted to deal with specific situations. if monetary policy is used in a systematic way, it could lead to a general loss of its effectiveness and credibility. however, monetary policy has played a crucial role in supporting financial stability in several critical occasions. since the great financial crisis, central banks have increasingly recognised the importance of providing liquidity and making sure that the transmission mechanism operates properly. more recently, the introduction