Euro zone growth risks materialising, warranting ECB caution: Centeno

FRANKFURT (Reuters) -The European Central Bank needs to be very cautious about any further policy tightening as euro zone economic growth has been weaker in recent months than expected, and a lot has already been done, Portuguese policymaker Mario Centeno said on Wednesday.

The ECB is debating whether to raise rates again in September to combat stubborn underlying price growth or pause given the weakening outlook that is now raising recession fears.

"We need to be very cautious about our decisions, because a lot has been done," Centeno told the Reuters Global Markets Forum. "And also, because we know that even after pausing, financial tightening conditions will remain in place."

The ECB lifted rates at each of its meetings over the past 13 months, taking its deposit rate from deep within negative territory to a more than two-decade-high of 3.75%.

While Centeno would not say which way he was leaning for the September meeting, he argued that even if the bank paused, it would be a mistake to say it was done.

"We will only be done once inflation is on a trajectory that takes us to the 2% mark. So we need to be very clear that this is an ongoing process," Centeno said.

At over 5%, inflation has already fallen by half since last autumn, but price growth is still seen above the ECB's 2% target through 2025, even if rapid disinflation is in the pipeline, which could lower the rate to under 3% by the close of the year.

Still, Centeno downplayed one of the key worries of his colleagues; that an exceptionally tight labour market could add to price pressures and actually prevent inflation from falling to 2%.

He said the labour market is displaying a sort of novel flexibility not recorded before, so the contribution to inflation could also more benign as long term unemployment is down, participation rates are higher and the jobs market is more inclusive.

"The labour market in Europe is performing in a novel way... I see a degree of flexibility in the European labour market that we were not used to see in the past," Centeno said. "This will ease wage pressures in our labour market, contrary to what we have [been used to] in the past."

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(Reporting by Mehnaz Yasmin; Writing by Balazs Koranyi; Editing by Alison Williams and Mike Harrison)