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.