Unstable economic climate dictates next governor's policy

The next governor of the Bank of Portugal (BdP) will not have an easy task. The president of the European Central Bank (ECB), Christine Lagarde, has already admitted that “we live in a much more uncertain world” and monetary policy may have to change strategy, as experts admitted to Nascer do SOL, considering that “the challenges are numerous in an international panorama marked by high uncertainty, dictated by global geopolitical tensions”.

Speaking to our newspaper, Banco Carregosa’s senior economist, Paulo Rosa, stated that “as the global economic slowdown deepens, the Portuguese economy will face increasing difficulties in maintaining the growth rate recorded in recent years, supported by record employment levels, the dynamism of tourism and significant foreign investment”, recalling that, although the ECB has reduced interest rates by 200 basis points in the last twelve months, from 4% to 2%, they remain relatively high compared to the period of negative interest rates of the last decade. And, although the level of public debt has fallen sharply in recent years, private debt remains on an upward trajectory. “In this context, the Bank of Portugal should further strengthen the resilience of the banking sector in the face of external shocks, whether of a geopolitical, energy or technological nature. At the same time, it will be crucial to adapt banking supervision to digital transformation and the growing importance of fintechs and cryptoassets in everyday life, ensuring that financial innovation does not compromise the security and stability of the system. Furthermore, it will be essential to strengthen the credibility and independence of the Bank of Portugal, ensuring effective communication and defending national interests in the context of the European banking and monetary union”, he stresses.

Inflation and interest rates: what to expect According to Paulo Monteiro Rosa, central banks will tend to assume an even more central role in managing systemic risks, given an unstable economic climate marked by two wars, and in preserving financial stability. “Although their main mission, price stability, remains, they may be forced to ‘change course’ in certain areas, adopting more flexible policies that reconcile fighting inflation with supporting economic growth and strengthening the resilience of the financial system”, he tells our newspaper, admitting that regulatory bodies will have to strengthen coordination with governments to deal with external shocks – energy, technological and military – to ensure that monetary policy does not conflict with the needs of economic and social security.

And despite acknowledging that inflation has slowed considerably and is now close to the ECB's target of 2%, helped in part by the drop in the price of a barrel of oil, he points out that this combination of factors is deflationary and could allow the ECB to move forward with additional interest rate cuts, in addition to the only cut currently anticipated by the market by the end of the year. "The appreciation of the euro against the dollar, currently at its highest level since September 2021, also reinforces the ECB's room for manoeuvre to reduce interest rates, if this trend of economic slowdown continues", he adds. XTB analyst Henrique Tomé also admits that, currently, inflation is expected to remain more persistent than initially expected and, as such, money markets anticipate that the ECB's interest rate cuts will be more modest and implemented more gradually. “Inflation is likely to remain above targets until the end of 2026. In this context, the ECB is likely to make only one more interest rate cut. Even so, both the pace and magnitude of these cuts have been gradually slowing down,” he points out.

Less relevant role According to the XTB analyst, the role of the governor of the Bank of Portugal has been losing relevance in recent years, «partly due to failures and a lack of transparency towards the population», also mentioning that, «in addition, his powers in monetary policy are quite limited, since the main decisions are taken by the European Central Bank». However, he leaves a warning: «With the economy showing signs of acceleration, inflation falling and interest rates falling, the challenges that await the next governor seem, at first glance, less demanding than those faced by his predecessors», hence the argument that the next governor should be «a totally transparent person and capable of communicating relevant information to the population in a simple and accessible way», adding that «it is essential that he can clearly explain forecasts about interest rates, inflation, salary developments and changes in purchasing power – crucial factors for citizens to be able to make informed and rational economic decisions».

At the same time, Henrique Tomé argues that this profile must be free from any political-party ties, “ensuring a truly independent performance from national politics”, considering that it is “equally important that he/she has solid experience in macroeconomics and the banking sector, as well as a prudent and rigorous stance with regard to the supervision of financial institutions”. An opinion shared by Paulo Monteiro Rosa when he argues that the desired profile for the next governor of the Bank of Portugal should be based, above all, on independence and a reputation for being equidistance from political power. “It is essential that this is someone with recognised technical credibility, relevant experience in the financial sector and the ability to assert the institutional autonomy of the Bank, ensuring the trust of the markets and society”, he concludes.