The ECB sees the current level of interest rates as sufficient to control inflation

2023-09-22 14:48:58

The vice president of the European Central Bank (ECB), Luis de Guindos, considers that the current level of interest rates is sufficient to control inflation and achieve the 2% objective if monetary tightening is maintained for long enough. “What central banks are doing is going from looking at the level of interest rates to looking at the duration of that level of interest rates,” said Guindos, who spoke at an economic forum organized by Kreab. He did not quantify how long will be “enough”, but he did recognize that the transfer of rate increases to families and companies has been very rapid and the granting and demand for credit has been greatly reduced. Now we need to see the transmission to economic activity and how this hardening acts on activity and on the evolution of prices. Typically, it takes between 12 and 24 months to fully see the effects of monetary policy.

In any case, the vice president of the ECB pointed out that inflation has already been reduced by half (it exceeded 10% a year ago and is now above 5%), but it is still far from the objective and the risks are upward. Among the elements that put upward pressure on inflation are the rise in the price of oil, the war after the invasion of Ukraine, the depreciation of the euro that also affects prices and the evolution of labor costs, not so much due to wage increases but due to reduced productivity. However, in the opinion of the former Minister of Economy, business margins, which rose a lot in 2022, will not do so this year because employers are aware that demand is reducing and will absorb part of the increase in labor costs without transferring it to prices.

The ECB predicts that economic growth “will be weak in the coming quarters” and Guindos insisted that there is “a lot of uncertainty”, also due to the geopolitical situation. Likewise, he warned against a government fiscal policy that is “more expansive than it should” and increases public deficits in 2024. In this context, the European Commission’s recommendation that countries withdraw fiscal aid measures against the energy crisis or the increase in food prices, and that if any persists it will be very focused.

Regarding the situation of banks, Guindos commented that banking in Europe has greatly improved its profitability, which stands on average at 10% when before the pandemic it was 4%, but this is not being reflected in its stock price because “there are doubts about the sustainability of this improvement in profitability” due to the economic slowdown, the reduction in the granting of credit and “because it is being discounted that there may be an increase in provisions.” In fact, the vice president of the ECB pointed out that provisions are going to rise and that the supervisor “is going to look more and more at the capital and liquidity situation of the banks and we are going to ask for prudence in the distribution of dividends and the repurchase of shares.” ».

He also pointed out that banks will reward their clients’ savings better and that “deposits will be more remunerated”, in line with the rate increase maintained by the ECB.