Government argues that ECB should “act carefully” in response to inflation

ANDin an interview with Lusa about a week after the ECB increased interest rates again, Joaquim Miranda Sarmento considered it “I need to act carefully because this is a crisis quite different from what happened in 2022”, when inflation peaked following the Russian invasion of Ukraine.

“ Every time the European Central Bank considers raising interest rates, it [must] understand whether this actually has an impact on inflation control or not, because, in this situation, monetary policy is less effective and has less degrees of freedom,” he said.

This is because “we continue to have, above all, a shock on the supply side,” said Joaquim Miranda Sarmento, alluding to the impact of the Middle East conflict in an oil producing area on the prices of raw materials, gasoline and diesel.

According to the minister, monetary policy responds to demand shocks, while its effectiveness is more limited when inflation results from supply-side factors.

“Monetary policy needs to be used carefully because we are not faced with a demand shock,” the minister stressed in his interview with Lusa, outside the informal meeting of Economic and Financial Affairs Ministers (Ecofin) in Dublin.

The minister recalled that, when the war in Ukraine began, inflation was already “nearly 6%”, a situation which he considers to be different from the current one, when there are lower levels.

“ With no demand shock, monetary policy has much less efficiency in its performance and this is what the ECB should take into account”, he said.

Still, he said to admit the intervention of the central bank of the single currency, as “the ECB cannot lose the credibility of its mandate either”.

The ECB aims to maintain inflation around 2% for price stability in the euro area.

The statements take up the position that Miranda Sarmento had expressed in June, when she considered that the rise in interest rates announced at the time by the ECB due to inflationary pressures associated with the Middle East war “was not absolutely necessary”.

Following the Russian invasion of Ukraine, the ECB started, in the summer of 2022, a cycle of rising interest rates to combat inflation and made 10 consecutive increases until September 2023.

After maintaining interest, the central bank initiated cuts in June 2024 and subsequently maintained a path of reducing the fees.

As early as June this year, in view of the new inflationary pressures associated with the conflict in the Middle East, the ECB again increased the rates by 25 basis points and maintained interest unchanged in July.

About a week ago, the central bank re-upped the rates by 25 basis points, justifying the decision with persistent inflationary pressures caused by the conflict.

In Portugal, inflation accelerated to 3.3% in August, more 0.3 percentage points than in July, according to the definitive data of the National Statistical Institute.