ECB says ‘finish line in sight’ on inflation and interest rates
The vice-president of the European Central Bank (ECB), Luis de Guindos, told the Spanish newspaper ABC that “monetary policy measures are beginning to have an impact on financing conditions”, that is, the recent increases in interest rates by the ECB Basic services begin to impact the rates paid by consumers and lead people and companies to take out less credit.
“The credit crunch will spill over into the real economy,” de Guindos said. “In turn, decreasing demand will reduce inflation.”
De Guindos told the newspaper, in an interview that the ECB itself shared on its own website in English and Spanish, that the ECB currently expects nominal inflation to fall to 5.4% this year, 3% next year and stay just slightly above the euro zone target of 2% through 2025.
However, he also warned that underlying inflation – excluding prices of basic goods such as energy and food – was rising more sharply, “mainly driven by unit labor costs”.
Energy and food prices are well past the peaks seen during the initial shock after Russia’s invasion of Ukraine and have been falling, very sharply in the case of energy prices, in recent months.
De Guindos described the European labor market as “robust” and said ECB data suggested that inflation was driven less by wage increases aimed at offsetting inflation and more by a slowdown in productivity leading to rising labor costs for the same output. . He did not speculate on the possible reasons behind this.
The bank’s deputy also said he believed that “the priority now is to bring down inflation”, and that if that means a slight recession or suffocating economic growth, it will be a price worth paying given that “it is very difficult for growth economic and stability coexist with high inflation” over time.
Avoids questions about future interest rate movements
The ECB, like most western central banks, has steadily raised its benchmark interest rates – after an unprecedented 15-year period at or near 0% after the 2008 financial crisis – over the past year.
It was criticized in some quarters in 2022 for being slower to react and start raising rates than the US Federal Reserve; the Fed managed to stop its series of rate hikes for the first time in a year this month, unlike the ECB.
The ECB’s most recent hike, earlier this week, raised its main refinancing rate — arguably the most important of the three rates it sets for commercial banks — by 25 basis points, to 4%.
The ECB has indicated that further increases throughout the year are likely, without saying explicitly what or when, and de Guindos also avoided the question in Sunday’s interview.
“That will depend on the data,” he said when asked if he expects another rise over the summer break. “So far we’ve raised rates by 400 basis points and we can already see the impact this is having, but we need to make sure inflation converges and stays around 2%, our price stability target. underlying inflation is key.”
Eurozone inflation gaps ‘arguably steeper now’
The ECB is an unusual, if not unique, central bank in that its policies apply to all members of Europe’s single currency, the euro. Most central banks are responsible for a single country rather than sharing some of the responsibility for 20, although each eurozone member also has its own domestic central bank.
It has therefore always been difficult for the ECB to try to take into account all the economic needs and desires of its members. But de Guindos said the conflict in Ukraine is contributing to sharper regional variations, with economies closer to the conflict being hit harder.
“There have always been differences, but they are arguably more marked now. The proximity of war has a lot to do with it. Inflation is higher in the Baltic states,” he said.
Don’t forget the impact of the pandemic response, Guindos warns
De Guindos told the paper that, like Russia’s invasion of Ukraine early last year, the fallout from two years of pandemic economic policy – marked by a huge increase in government spending and borrowing and a near-widespread reduction in production – have been playing a considerable role in today’s economy.
“The current inflation scenario cannot be understood without taking into account the wave of shocks that hit Europe: the pandemic, the reopening of the economy and Russia’s invasion of Ukraine. Without the expansionist monetary and fiscal policies of 2020 and 2021, the drop in GDP would have been much more pronounced. In such exceptional circumstances, we must adhere to the principle of the lesser evil. There is no perfect measure to cover all economic parameters, so one has to choose the least harmful one, “he said.
Source: DW
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