Vítor Constâncio witnessed firsthand severe recessions, inflationary bouts, and a global financial crisis, as former Vice President of the European Central Bank (ECB) (2010 to 2018) and Governor of The Bank of Portugal (1985-1986, 2000-2010). He brings this considerable experience to examine the current challenges facing central bankers at the ECB as well as the Fed.
Constâncio argues that while U.S. inflation is driven by a strong demand generated by loose fiscal policy, the primary agent of European inflation was the surge in energy prices in 2022. However, he recognizes that what began as supply-side pressure has broadened out to other sectors of the Euro area economy, so the ECB’s hiking of interest rates to 4% was necessary. Constancio expects that a mild recession in Europe will tame inflation and that substantial further rate hikes from the ECB will likely not be needed. Filmed on July 6, 2023.
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Timecodes:
00:00 Introduction
00:48 Euro Area Inflation Is Mostly Due To Energy Shock, Not Demand
08:13 I Would Support A Pause In Interest Rate Hikes, Says Constancio
10:11 Recession In Europe Is Likely For 2023
14:35 ECB Unlikely To Cut Interest Rates During A Mild Recession
16:20 There Pressure on The European Central Bank (ECB) To Follow The Federal Reserve?
20:44 Exploring The Logic Of Negative Interest Rates
25:29 Interest Rates’ Impact On The Economy
32:04 Fixed vs. Floating Mortgages
34:48 ECB’s Reaction Function During The 2008 Great Financial Crisis
44:16 Recent Bank Failures (Silicon Valley Bank)
49:51 Credit Suisse
51:51 Basel III Regulation of Held-To-Matuity Accounts and Interest Rate Hedging
54:47 Fighting Inflation In 1970s Portugal
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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets….(read more)
BREAKING: Recession News
LEARN MORE ABOUT: Bank Failures
REVEALED: Best Investment During Inflation
HOW TO INVEST IN GOLD: Gold IRA Investing
European Inflation Will Be Tamed By Mild Recession & Rate Hikes, Says Veteran Central Banker
As the European economy continues to grapple with the fallout from the pandemic, a veteran central banker believes that a combination of mild recession and strategically timed interest rate hikes could help tame inflationary pressures on the continent.
In recent months, concerns about rising inflation have dominated economic discussions, and policymakers worldwide have been scrambling to find effective ways to combat it. The European Central Bank (ECB) has been at the forefront of these efforts, but with limited room to maneuver due to historically low interest rates, the challenge remains daunting.
However, according to a seasoned central banker, who has witnessed various economic cycles and crises throughout their career, a mild recession combined with carefully implemented rate hikes could help mitigate inflation in the Eurozone.
The theory behind this approach is that a mild recession would naturally dampen demand in the economy, thereby alleviating inflationary pressures. When the economy is in a downturn, consumers tend to tighten their belts, resulting in reduced spending, which in turn can ease upward price pressures.
However, the central banker emphasizes the importance of complementing the recession with carefully timed interest rate increases. It is crucial for central banks to strike a balance in managing interest rates to prevent economic stagnation or excess tightening, which could further exacerbate the recession.
By gradually raising interest rates, central banks can deter excessive borrowing and spending, thus cooling down the economy without causing a major shock. This approach aims to curb inflation by limiting the amount of money flowing through the system, which can lead to increased prices.
While the idea of raising interest rates during a recession may seem counterintuitive, past experiences offer some insights. Economies such as the United States and Germany have successfully employed this strategy in the past to tame inflationary pressures and restore stability.
However, implementing this strategy requires expertise and careful execution. Central banks must meticulously evaluate economic indicators, including inflation expectations, wage growth, and productivity, to determine the appropriate magnitude and timing of rate hikes.
Moreover, this strategy relies heavily on effective communication and transparency from central banks to manage market expectations. Clarity on the rationale behind the moves and their potential impact is vital to ensure stability and prevent any unwarranted disruptions.
While the approach proposed by the veteran central banker appears to offer a potential solution to the inflation conundrum, challenges persist. The timing and magnitude of rate hikes pose significant risks, as premature or excessive tightening could undermine a fragile economy and curtail growth.
Additionally, the European economy remains vulnerable to external shocks, such as global trade tensions or geopolitical uncertainties, which could complicate the implementation of this strategy.
Nonetheless, with the right combination of a mild recession and well-calibrated rate hikes, it is possible that European inflation could be successfully tamed. As policymakers continue to navigate uncharted territories brought on by the pandemic, drawing upon the experience of seasoned central bankers may prove beneficial in charting a path towards stability and growth.
Thank you guys!!
As an european I enjoyed this episode a lot. Very valuable talk. Thanks!
Some economists have projected that both the U.S. and parts of Europe could slip into a recession for a portion of 2023. A global recession, defined as a contraction in annual global per capita income, is more rare because China and emerging markets often grow faster than more developed economies. Essentially the world economy is considered to be in recession if economic growth falls behind population growth.
One of the keys to effective investing is focusing on the companies rather than the stock.
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So go out and wash it for a woman..
Used to like this page but lord do you guys only push negative info. Kind of sad at this point
this guy was sleeping at the wheel through the colapse of multiple banks in Portugal during the 2000's. He's clueless
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Wait, European banks are better, but Basel 3 alsonsets no limit to the held to maturity part?
It relies on a stress test of plus 2% which requires banks to 'give an explanation'
"We had a very controversial decision in July 2008, when the ECB decided to raise interest rates."
Rasing rates in the middle of a crisis blew up the overly leveraged south european families. Many people will ever forget the name of Jean Claude Trichet. He almost managed to break up the Eurozone. Sad the lack of accountability.
It's depressing to follow US fiscal policy until you see a guy like this. It could be much, much worse.
I guess there's no end to the delusional perspectives you can come up with when you look at averages.
The "economy" as a pile of money moving around might look fine. But the "economy" as in the actual financial lives of the people in the country can be completely simultaneously dismal.
The average of one child eating another child's food is still 1 meal per child. Doesn't change the fact that one of those kids is starving.
Economic investigator Frank G Melbourne Australia is still watching this very informative content cheers Frank ❤
This is the type of thinking that brought inflation to Europe. But more content on Europe would be welcome.
The news media is currently flooded with economic statistics. It takes a lot to see beyond the sea of headlines and focus on what matters, which is that no matter how low equities fall, they always rise again. I completely disregard all news and continue to invest. I recently set aside $45k to invest in the market as we anticipate a meltdown. Do you have any suggestions?
Two weeks to flatten the curve soft landing got it
Im Portuguese and in terms of Political Governors, it's simple, we don't like them… But it was good to see a Fellow Portuguese guy invited to your program. We may dont like him but keep up the good job, everybody has a voice and deserve to talk his/her ideas.
Cheers
The sleeping man at the job, closed eyes to Espirito Santo Bank fraud…
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Because it directly impacts people's cost of living, which they experience right away, inflation is much more destructive to people than a declining stock or real estate market. The severe pessimism of the market sentiment at this moment is not surprising. Help is essential if we are to live in the economy of today.
Getting real "scumbag banker" vibes from this one.
BS
CONGRATS
GOODBYE ALL MY INVEST
Silahkan dong kalian nik mati lah semua dampak dan risikonya, kan ini yang kalian suka dan mau ?
Sorry I don't like invest again
We want to issue the only valid green bond ins europa. We will use it to force citizens of brussel, straßburg unt frankfurt to move into the vast empty spaces of spain to do frugal and self sustaining living. No long transports with trucks to city centers from central hubs, nor by ship from distant sources.
Everything else 'green' is a fraud, which the ECB and EU also are.
In the dreamland
I appreciate your analysis, I find it hard to understand how such an intelligent person can remain a willing part of continuing this toxic mess of an economy. Ponzi. Have some empathy for the people at the tail end of your so called "fiscal policy" which is getting completely fascistic
"I was for negative interest rates, then I wasn't a fan of them."
What a weapon of mass destruction this guy is.
US appears to have had low fixed rate mortgages up untill recently, Europe generally has short term fixed and alot of variable rate. Both has seen massive price increases since covid. It's not about interest rates its about availability of easy credit.
Did you expect him to say anything other than the official narrative ?
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How can anyone expect serious and honest assessments about the economic development of the EUROzone by this EUROcrat. He simply is professionally inhibited to give any candid or truthful answers!
The main threat to the cohesion of the EUROzone and then also the EU as such lies in the fact that countries like Italy and Spain, France and to some extent this guy‘s Portugal cannot stand a much longer period of high and increasing interest rates whereas countries like Germany, the Netherlands and others cannot and will not tolerate sustained high inflation. And all of them together cannot and will not survive a severe recession. The main problem with the later scenario is, that Germany simply won’t be able to spend the way out of it. Germany’s industrial base already has shrunk considerably and in a further recession will shrink even faster. Any large bail out of other European countries will not be politically enforceable in Germany!
I am Portuguese and this guy is related to many corruption cases in Portugal in the past!!! He is a shameless person.
The only thing the can understand is softlanding