ECB’s de Guindos Indicates 2021 HICP Projection to be Hiked Next Week

2 March 2021

By David Barwick – Frankfurt (Econostream) – European Central Bank Vice President Luis de Guindos indicated Tuesday that the ECB’s inflation forecasts to be updated next week would reflect expectations of higher inflation this year than projected in December.

In an interview with Portuguese daily Público, de Guindos, according to a copy made available by the ECB, said that the ECB was ‘totally open’ to recalibrating its policy stance once again if tighter financial conditions resulted from the current increase in nominal yields.

The increase in euro area inflation in January was due to base effects; for the entire year, it would be ‘above 1% on average’, he said. The ECB’s December staff projections called for HICP of 1.0% in 2021.

Asked whether he was worried that expansionary policies could lead to very high inflation, he observed that the output gap reflected weak demand but that ‘there is a great deal of monetary and fiscal stimuli, plus an increase in commodity prices and the recovery in world demand.’

‘All in all, I would say that we do not need to be very concerned about inflation in the short term, and in the medium term we will continue to look at it very carefully, as we always do’, he said.

De Guindos noted the existence of ‘structural factors that could push inflation up all over the world’, citing supply chains that would be more regional and a slowdown of globalisation.

‘But in the short term, in the next 12 months, inflation will remain below our aim on average’, he said.

Keeping financing conditions favourable remains the ECB’s priority at present, he said. The recent increase in yields he attributed to higher expected U.S. inflation on the back of fiscal plans there, higher commodity prices and stronger global demand.

If the ECB were to decide that the increase in nominal yields was negatively affecting financing conditions, he said, ‘then we are totally open to recalibrating our programme including the envelope of our pandemic emergency purchase programme (PEPP) if necessary. We have room for manoeuvre, and we have ammunition.’

However, he continued, there is also ‘some good news’ in that while yields have increased, spreads have not, indicating that the ECB is managing to avoid fragmentation. Yields are thus rising both in core countries and on the periphery of the euro area, he said.

‘This will be the key factor over the coming weeks and months for our monetary policy, i.e. understanding whether this increase in yields is due to trends in inflation or whether there are other factors that could hinder economic recovery’, he said. ‘And that is something that we will have to examine, but one thing is clear: we have the flexibility that is needed in order to react.’

The PEPP will be recalibrated ‘depending on the evolution of the pandemic and the impact the pandemic is having on the economy’, he said. ‘It is something that will be around until the pandemic and its consequences have come to an end.’

De Guindos made clear that progress in vaccinating people was the key to sustainable economic recovery. If the pace of vaccinations picks up, he said, most Europeans could be vaccinated in summer. With manufacturing already ‘doing well’, the lifting of containment measures ‘will be very good news for the services sector’, he said.

The ECB hasn’t yet finalised the staff macroeconomic projections to be updated on March 11, he said. Growth in the first quarter ‘and perhaps the second, will be relatively weaker than expected, but by the second half of the year, if the vaccination programme goes as we hope, we could see a noticeable rebound in activity’, he said.

The ECB would like the EU recovery fund ‘to be implemented as soon as possible’ in a way that leads to higher potential growth, he said. Hopefully by mid-2021 the money will start going to recipient countries, he said.

In addition to violating the Treaty, debt cancellation by the ECB would just reduce the national central banks’ annual transfers to their respective finance ministries, he said. ‘What you gain from the improvement in countries’ debt ratios would be offset over time with a lower flow of dividends paid by the ECB and the national central banks to the different governments’, he reasoned.

Debt cancellation would also open the ECB to suspicions of fiscal dominance, undermining its credibility, he said.