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Luis de Guindos
Vice-President of the European Central Bank

Interview with Naftemporiki

Interview with Luis de Guindos, Vice-President of the ECB, conducted by Michalis Psilos

19 March 2024

Inflation has been declining and the European economy has been slowing, especially the German one. However services inflation is sticky and the labour market is still tight. President Lagarde indicated in the last press conference that in June there will be enough data for the ECB to make a decision on interest rates. Is a cut likely in your view? What would you like to see first? Is there a risk of a wage-price spiral in the near future that could delay such a cut?

Looking at recent inflation developments, we can see a very clear disinflationary process. This is reflected in both headline and core inflation readings. The main risk is the combination of high wage growth, which is currently hovering around 5%, and very low productivity. These two factors together could lead to a significant increase in unit labour costs. And this is a risk, especially for services inflation, because services are labour intensive and shielded from foreign competition. In that sense, services inflation is stickier. And that’s why we need to wait. The evolution of wages is key and most of the wage bargaining agreements will have been concluded in the first months of this year. We will have more information in June.

What would you expect the path to be once you start cutting rates? Will it be a steady path or will it be data-dependent? And what could this path mean for the prevailing financing conditions and especially for mortgages and commercial real estate? Could this affect banks?

Rates affect financing conditions. That’s how monetary policy works. When rates go up, financing conditions tighten and loans become more expensive – and this works in the other direction, too. We haven’t yet discussed anything about future rate moves. We need to gather more information. In June we will also have our new projections and we will be ready to discuss this. We are not date-dependent – we are data-dependent. We will have to decide when to adjust our policy stance based on the data we see.

Is there a risk that your monetary policy overperforms and maybe inflation drops significantly below 2% in 2025 or 2026?

If you look at our projections, that’s not the case. We project that inflation in 12 to 18 months from now will be hovering around our 2% target, but we don’t see a risk of it falling below that. We need to see a steady, continuous convergence of inflation towards 2%.

How would you counter such an outcome though, especially if this led to an unnecessary economic slowdown? Would a pause in the reduction of your asset purchase programme (APP) portfolio be an option?

It would depend on the data. We have indicated very clearly what we will be doing with the APP and the pandemic emergency purchase programme (PEPP). We must bear in mind that asset purchases – also known as quantitative easing, or QE – were a response to an extraordinary situation. Our main monetary policy tool is the set of key interest rates. But QE will remain part of our toolkit. And if we need it, we can use it again.

Do you think that the ECB would have to wait for the Federal Reserve to make a cut first, or would you proceed independently? Is there a risk of the euro weakening if you act first, which might fuel imported inflation?

We act independently. The Federal Reserve is, of course, the central bank of the world’s largest economy, and we do look at what is happening in the US economy. But we are data-dependent not Fed-dependent, as President Lagarde has indicated in the past. We do not target the exchange rate. Several factors influence exchange rate developments including differences in terms of economic performance, the evolution of inflation and the decisions taken by monetary authorities. We monitor developments continuously, and I am quite sure that the Fed is also looking at what’s happening in Europe and at the decisions we take. Central banks communicate with each other frequently, but in terms of the decisions we take, we are totally independent.

Speaking of the Fed, Europe is facing an uncertain relationship with the United States given the elections in November. What do you think about that?

We do not comment on the internal political issues of other countries. We have a lot of respect for democratic processes all over the world. And as you know, we will also have elections in Europe in June. We will do our best to deal with whatever the different societies decide. The ECB is not involved in politics.

Where do we stand with the digital euro? Some people are calling for a very low limit on the amount that citizens would be allowed to hold. What is the ECB’s position?

A digital euro would be an extension of the physical euro. In a sense, what we want to offer is banknotes in a totally different form – instead of having them in our wallets, we could have them in our phones in digital form. This would be a digital means of payment. The digital euro would not replace physical notes, and it would not be a form of investment. So it would not compete with our bank accounts. We will decide on the exact limits at a later stage. The main message is that a digital euro would play a similar role to the physical euro.

Finally, I would like to ask you about Greece. How would you describe its economic situation? What is your view on the progress made by the Greek banks, which were in a very difficult position a few years ago?

Greece is outperforming the rest of the euro area and is reaping the benefits of the policies that were implemented during the crisis years, which were indeed very tough. The Greek people have been through many hardships and made great sacrifices. And now the Greek economy is performing well. First, in terms of growth. Second, in terms of reducing the fiscal deficit. And third, in terms of reducing the public debt ratio. At the same time, the situation of the Greek banks is evolving in parallel with the improving economy. The banking system is much more resilient than it was six or seven years ago. But there is no room for complacency. The public debt ratio must continue to fall because it’s still much higher than the European average. And even though Greek banks are in a far better position than they were in the past, they must continue cleaning up their balance sheets. Overall, Greece is on the right path.


European Central Bank

Directorate General Communications

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