More ECB Hiking Puts Euro-Zone Growth in Peril, Portugal Warns

(Bloomberg) -- Further interest-rate increases by the European Central Bank would add to the dangers for the euro-area economy as it seeks to exit a recession, Portugal’s finance minister cautioned.

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Inflation is already on a downward trend following an unprecedented bout of monetary tightening by the ECB, Fernando Medina said in an interview. Meanwhile, the effects of rate hikes to date haven’t yet been fully absorbed by households and companies.

“The risks that further increases could create a more difficult situation for growth at the European level are now higher and should be looked at very carefully,” Medina said this week in Lisbon.

Warnings about the consequences of additional tightening are growing louder as the ECB nears the end of a campaign that began a year ago and has brought its deposit rate to 3.5% from below zero.

Portuguese Prime Minister Antonio Costa said last month that officials in Frankfurt haven’t properly grasped the nature of the inflation that the euro area is facing, while his Italian counterpart, Giorgia Meloni, has said “constantly increasing rates” risks turning into “a cure that does more harm than good.”

Output in the 20-nation bloc shrank between October and March after prices surged and policymakers moved aggressively to rein them in. In Portugal, where inflation has eased to 4.7% from its euro-era record late last year, consumers are being squeezed by the prevalence of ever-rising variable interest rates on mortgages and loans.

Despite that, Portugal’s post-pandemic economy is outperforming much of Europe with employment remaining very strong, according to Medina. This year’s 1.8% growth forecast — published in April — may be surpassed, he said. The central bank, for one, predicts 2023 expansion of 2.7%, driven by tourism.

That may counter grumbling among some about low wages and Portugal being overtaken by eastern European Union members like the Czech Republic and Slovenia in terms of gross domestic product per capita.

“We’re converging, we’re improving our position inside the euro zone,” Medina said. “We’re facing a structural change in the Portuguese economy, in the good direction.”

That transformation includes lowering what’s currently the euro area’s third-highest debt ratio, behind Greece and Italy. This year’s figure will be below 107% — beating the 107.5% target set in April, according to Medina.

“We’ll most probably end 2023 with a burden of debt on GDP that’s lower than Spain, France and probably Belgium,” he said.

Portugal’s 10-year bond yield was at 3.4% on Wednesday, up from 3.1% six months ago but still lower than the rate for Italy or Spain. It peaked at 18% in 2012 at the height of Europe’s debt crisis.

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