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Profit margin growth 'unsustainable' -ECB's Centeno

Profit margin growth 'unsustainable' -ECB's Centeno
Profit margin growth 'unsustainable' -ECB's Centeno Copyright Thomson Reuters 2023
Copyright Thomson Reuters 2023
By Reuters
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DAVOS, Switzerland - Evidence from Portugal suggests some companies in the euro zone have been able to increase profit margins at a rate that risks hampering efforts to bring inflation down, Portuguese central bank governor Mario Centeno said on Wednesday.

    "The numbers for Portugal are very clear: profit margins increased quite a bit in 2022," Centeno, who sits on the European Central Bank's rate-setting council, told Reuters on the sidelines of the World Economic Forum in Davos.

    "That is not sustainable, not only because that will have an impact on prices, but also on demand. So I think it will be a myopic perspective on the side of firms. This will increase the social pressure on wages to go up."

Centeno said he had raised this issue domestically in Portugal but added "at the European level (it) has not been as high on the agenda as I would like."

One difficulty central bankers face is that corporate margins are harder to measure than wage developments, meaning that statisticians have to resort to surveys or proxies to get a sense of how they are evolving.

However, Centeno said it was clear that company margin increases had as much potential as wage gains to force monetary policy to react if they were fueling inflationary pressures.

    "1% point of extra margins or 1% of wages will prevent inflation from coming down. That might be good in the short term but if inflation resists coming down, the central bank must be more forceful in terms of policy and it will be bad for everyone."

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