Interview with Ta Nea
Interview with Luis de Guindos, Vice-President of the ECB, conducted by Maria Vasileiou
16 June 2022
What prompted the decisions taken last week and what sort of interest rate hikes should we expect following the first one in July?
Inflation is very high. Our projections indicate that it will only gradually start coming down later this year, remaining above our target throughout the projection horizon. Inflation is more persistent and broad-based than we thought some months ago, but it will continue declining in 2023 and 2024. The Governing Council has indicated that it is fully committed to taking inflation back to our definition of price stability – 2% over the medium term – and has started the normalisation process. That includes ending net purchases under the asset purchase programme as of 1 July. And we have also provided forward guidance on interest rates by signalling two increases for July and September. We intend to raise rates by 0.25% at our meeting on 21 July. For September, we can consider a bigger increase, if the inflation outlook persists or deteriorates. Our future decisions will be data-driven.
There has been criticism, partly because the Fed and the Bank of England started adjusting their policies earlier, that the ECB’s rate hike is coming rather late in the day…
First, let me stress that we started responding to inflation several months ago. In December we decided to discontinue net asset purchases under the pandemic emergency purchase programme (PEPP) in March. And the economic situation in the euro area is not the same as in other parts of the world. The current bout of inflation is a global phenomenon, although it started to affect Europe a little later than elsewhere, which explains why our response has been a little later than in other jurisdictions. As soon as we saw that inflation was becoming more entrenched, we acted swiftly and decisively. Unlike in the euro area, domestic demand appears to have been a stronger driver of inflation in the United States.
Are you concerned about secondary pressures?
This is a risk that we have to take into consideration. Inflation is going to be higher than expected for a longer period. The longer it remains high, the greater the likelihood of second-round effects. So far we haven’t seen large increases in wage claims and settlements, but we need to monitor that situation very closely.
The ECB’s macroeconomic projections have been revised significantly downwards. Is there a risk of a recession?
We revised the growth outlook downwards for 2022 and 2023 because of the impact of the war in Ukraine and because of the deterioration in the terms of trade resulting from the increase in commodity and energy prices. We now have to earmark a larger part of euro area income for spending on these more expensive factors of production as a result. In terms of net income, households and businesses will be poorer than before the war. This factor is reflected in our growth projections. Our baseline scenario indicates, though, that we will not have a recession (defined as two consecutive quarters of negative growth). But we will have low growth. In more extreme situations – such as severely disrupted energy supplies, as assumed in our downside scenario – growth would turn negative in 2023.
Sovereign bond yields are rising. Is there a risk of financial fragmentation, and what tools might be used if reinvesting PEPP proceeds is not enough to prevent it? Do you think that markets will test you?
Fragmentation – or the impaired transmission of monetary policy – has always been a concern for the Governing Council. The PEPP was launched with flexibility in mind, and this applies to the PEPP reinvestment phase as well. We also decided yesterday to mandate the relevant Eurosystem Committees together with the ECB services to accelerate the completion of the design of a new anti-fragmentation instrument for consideration by the Governing Council. Markets should have no doubts about how determined we are to address fragmentation.
Greece is about to exit enhanced surveillance. You dealt with the Greek crisis as a member of the Eurogroup. How do you see Greece’s economic situation now?
The turnaround in the Greek economy has been impressive. The difference between the situation we had six or seven years ago and the one we have now is like night and day. Today, there is confidence in the Greek economy. This is a clear sign of Greece’s improvement, most notably in three areas. First, its economy is now more competitive thanks to the structural reforms implemented. Second, it enjoys a better fiscal position. And third, the Greek banking system is more resilient in terms of its capital and liquidity position. But there are vulnerabilities. The Government should continue strengthening the country’s fiscal position in the medium term by achieving successive primary surpluses, while the banking system should continue trying to reduce the level of non-performing loans. The times ahead won’t be easy – we will have higher inflation, lower growth, higher interest rates and higher yields. But I am confident that Greece will deal with these challenges successfully.
How are euro area banks faring in the current situation?
European banks have been able to navigate the pandemic, and they should also be able to navigate the challenges that the war is posing. They are better capitalised and more resilient than they were. While higher interest rates might in the short term help banks’ profitability by increasing their margins, the shift from floating to fixed-rate lending by some banks in recent years may offset some of these benefits. Not all banks are the same. Some are more sensitive to rising interest rates. The profitability and solvency of businesses might also be affected by the combination of lower growth, higher interest rates and increased input prices, raising asset quality concerns. Looking further ahead, the situation of households and businesses is going to be key as credit risk concerns resurface.