Mário Centeno gives a lecture on monetary policy to Ciências ULisboa students

Mário Centeno, former Minister of Finance and former Governor of the Banco de Portugal, came to the Faculty of Sciences of the University of Lisbon (Ciências ULisboa) to give a lecture on the role of central banks and monetary policies in the economy. The lecture, which brought together students from various courses this Tuesday in the Great Auditorium, was organised by the Department of Mathematical Sciences, as part of the Economics and Management class.

“This class provided access to a different perspective on concepts that the students had already begun to study and allowed them to discover how the application of these concepts was carried out by someone who was a protagonist in the so-called “real world”, highlights Raquel João Fonseca, lecturer in the Department of Mathematical Sciences (DCM) and responsible for the subject of Economics and Management, which is taught in most undergraduate courses at Ciências ULisboa.

Mário Centeno, Full Professor, is today an unavoidable name in Portuguese and European economic policy, having assumed the presidency of the Eurogroup between 2018 and 2020. And it was due to this experience that the invitation for the lecture at Ciências ULisboa was addressed to him, continuing the participation of external personalities in the Economics and Management classes. “Monetary policy is one of the topics covered by this subject. Professor Mário Centeno was invited because of all the experience he has gained over the years in this area,” adds Raquel João Fonseca.

During the lecture, Mário Centeno explained the role of central banks and the scope of action they can assume when it comes to ensuring the balance of the economy and avoiding crisis scenarios. The former Minister of Finance also drew on the recent past to illustrate the capacity of central banks to intervene to maintain economic stability. And so he recalled the inflation above 10%, which was recorded between 2022 and 2023, as one of the economic challenges that were successfully overcome under the supervision of the European Central Bank (ECB). “Everything went wonderfully. It happened like this for the first time in many years in Europe,” stressed the former governor of the Bank of Portugal, noting that this type of challenge had previously been known to “go very badly”.

In addition to being able to act on interest rates, central banks can purchase debt to increase the flow of money in circulation within the economy – but it is also true that these entities with supervisory and regulatory functions always attach special importance to labour market indicators. Mário Centeno recalls that the general increase in wages can lead to higher costs borne by companies which, in turn, result in increased inflation of products and services traded with consumers… which may then drive further wage increases and more costs for companies and, consequently, another rise in inflation of traded goods and services. It is due to this “negative cycle” that central banks closely monitor the evolution of the labour market, Mário Centeno reminded.

In response to a question from the students, the former Governor of the Bank of Portugal indicated that the “greatest nightmare” for central bank officials is the automatic indexation of goods prices to inflation, because in such cases it becomes difficult to halt the inflationary trend once it starts to take shape. On the other hand, long-term deflation is also an undesirable scenario because it may result in producers being unable to sell the goods and services they produce.

It is in the face of these and other scenarios that central banks play an important role in the credibility of the financial system. Only a portion of the money deposited in commercial banks is channelled into each institution’s reserves, with the larger share being used to support loans and other services provided by the banks to the public. If all a bank’s customers were to suddenly withdraw all the money they have deposited, it is likely that institution would have to close its doors, but Mário Centeno also recalls that it is the possibility of allocating only a part of these deposits to reserve funds that generates a “multiplier effect which is extremely powerful”, because it frees up money that can be invested in the economy. It is due to these two factors that the former Finance Minister considers that “credibility, stability and predictability are so important” for the banking sector.