Interview with Luis de Guindos, Vice President of the ECB, conducted by Markus Zydra and Meike Schreiber
February 8, 2023
Mr de Guindos, energy prices have fallen recently. Is the inflation nightmare coming to an end?
No, we should still be worried about inflation. There are indeed some favorable developments that are alleviating inflationary pressures, including the easing in energy prices that you mentioned. The appreciation of the euro on the foreign exchange markets also contributes to this. In addition, there are fewer pandemic-related delivery bottlenecks. However, we see that the reopening of the economy in China after the lockdown is leading to higher demand for energy, metals and commodities. This can create further price pressure. And wages are rising too.
Isn’t it justifiable for workers to demand higher wages to offset inflation?
Yes, of course they are. But a wage-price spiral must be avoided. The parties in the ongoing wage negotiations look back on the high inflation of the past year. But inflation will ease over the course of the year: we expect an average inflation rate of around 6% this year, and 3.6% in the last quarter. However, unions may be inclined to demand excessive wage increases. We have to be careful.
Isn’t that a little harsh? Low-income households are particularly hard hit by inflation.
If we get caught in a wage-price spiral, the ECB will have to raise interest rates more than would otherwise have been necessary. In a wage-price spiral, nobody wins. Governments must support those most affected by introducing targeted subsidies to mitigate the effects of inflation. People could then reduce their wage demands and the ECB would not have to tighten its monetary policy as much. That would benefit everyone.
Many people are angry: inflation is falling, but only slowly. And prices remain high, they will not fall back to 2021 levels.
That’s right. Although inflation is gradually decelerating, prices are generally at higher levels today than they were a year or a year and a half ago. I understand that people find this disappointing. But this inflation was caused by extraordinary shocks: the sudden reopening of the economy after the pandemic and the war against Ukraine. The ECB must now ensure that inflation returns to our 2% target.
Looking back on a year and a half ago: Given the high inflation, what would the ECB do wrong in its monetary policy?
Central banks and many other organizations have long believed that the rise in inflation is temporary. I have to admit: That was a mistake, but the uncertainty was enormous. We all underestimated the persistence of inflation. We already decided in December 2021 to end our pandemic-related net asset purchases and started raising interest rates in July of the following year. In hindsight, we should have reacted earlier.
Should the ECB apologize to the public for this mistake?
We cannot change the past, we must look to the future. The best we can do is bring inflation back to our 2% target as soon as possible.
To what extent have people lost confidence in the ECB because of high prices?
Polls show that most people are confident that we can bring inflation back to 2%. This is clear from the measurable inflation expectations: Households and companies assume that inflation will soon fall again.
Equity markets are bouncing back as investors bet on slowing inflation and an impending end to rate hikes.
Financial markets may be overly optimistic about inflation developments and our monetary policy response.
When will the rate hikes end?
We raised our policy rates by 0.5 percentage point last week and will very likely raise them by another 0.5 percentage point at our next meeting in March. We’ll see what we’re going to do then. I’m not ruling out further rate hikes after March. The fight against inflation is not over yet. In the eurozone, consumer prices still rose by 8.5% in January (including an estimate for Germany) despite the fall in energy prices. Core inflation, which excludes energy and food prices, is 5.2%, the highest level in monetary union history. This is not good.
Interest rates that are too high could harm the economy. Is the ECB threatening to go too far?
Our mission is to maintain price stability. That’s it. That is the only mandate we have. High inflation harms everyone in society.
Interest rate hikes have a time lag. Have the measures so far had any visible effect?
Our interest rate policy takes effect after one to two years. But we are already seeing the first effects: the cost of borrowing for households and companies is rising, which weakens the demand for credit. This in turn contributes to the cooling of the economy and leads to lower price increases.
A question about financial stability. Heavily indebted conglomerate Adani is now under attack by a short seller. If Adani collapses, it could take the Indian banking system with it. Western banks are also heavily exposed to it. Are you worried about this?
We do not comment on individual companies. Apart from that, European banks have proved to be very resilient on average. Their profit margins have skyrocketed recently, making them more resilient, in part due to higher interest rates. On the other hand, the current economic slowdown could also have consequences. Of course, we keep a close eye on the non-bank financial sector or the shadow banks. Two years ago, for example, the difficulties at the private investment company Archegos resulted in large losses for several banks. We must monitor such risks closely. In general, we see two main risks to financial stability in the euro area. On the one hand, an exaggerated optimism in the financial markets regarding the inflation outlook and the monetary policy response, on the other hand, a possible contradiction in the direction of fiscal and monetary policy.
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