ECB Insight: de Guindos Ratches up the Hawkishness

21 September 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Vice President Luis de Guindos on Tuesday ratcheted up the hawkishness, sounding almost but not quite alarmed about the potential for price pressures to remain elevated and declaring economic risks that had loomed large earlier in the crisis to be essentially null and void.

At an online conference of the Financial Times, de Guindos gave the standard account of why euro area inflation was currently high but would subside from a high of 3.4% or 3.5% late this year and ‘continue declining until 2023 ... to a level of 1.5%.’

That was the ECB’s ‘central scenario’, he said, ‘but simultaneously, if you look at our monetary policy statement, we clearly indicate that there are some potential risks ... upside risks to this baseline scenario.’

Indeed, ECB President Christine Lagarde in her opening statement two weeks ago did acknowledge that underlying price pressures had ‘edged up’ and predicted ‘underlying inflation to rise over the medium term’, though this would be ‘only gradual’.

She also warned then that ‘[i]f supply bottlenecks last longer and feed through into higher than anticipated wage rises, price pressures could be more persistent.’

But Lagarde, queried on this during the Q&A, was rather dubious about such prospects, ‘because typically what we have seen in previous situations of that nature is that when you have a bottleneck in your supply, you try to find alternatives to that supply. And as a result of that the supply bottleneck impact on inflation is reduced and eventually goes away.’

De Guindos chose language that conveyed distinctly more urgency.

‘So far we have not seen any kind of indication that wages are on the rise, but we have to be very vigilant’, he said, ‘because this could give rise to much more permanent price pressures in the near future.’

He also tied the issue to financial stability. ‘What we have seen so far is that real interest rates have dropped, have declined ... so that’s why we have to be very vigilant. ... because we know that the potential impact could be not very good in terms of financial stability considerations.’

‘Very vigilant’, ‘much more permanent price pressures in the near future’, ‘not very good in terms of financial stability’… the difference in tone between Lagarde and her second-in-command was hard to overhear.

As for the implications of all this in terms of the degree of policy support, accommodation would be withdrawn ‘properly, according to the evolution of the economy...and the pandemic’ and thus in a ‘gradual’ manner, he said.

De Guindos was hawkish as well when it came to the economic outlook, preferring to speak of ‘good news in terms of the recovery’, given the region had ‘avoided the kind of problems we had projected only one year ago’, namely a wave of insolvencies and non-performing loans. Moreover, corporate profitability was near pre-pandemic levels, he observed.

Although all was not rosy, with public and private debt ‘clearly on the rise’, for example, de Guindos on balance was more enthusiastic than any other Executive Board member recently, and was willing to draw the natural conclusion.
‘We have taken some exceptional measures, but if the situation of the economy improves ... we will have to adjust’, he said.

De Guindos also sought to practise damage control related to the Financial Times’ reporting of late last week, when it emerged that Chief Economist Philip Lane had revealed an internal, non-public inflation estimate to private German bankers.

‘The longest inflation projection that I know is 2023’, de Guindos claimed, referring to the ECB’s (public) staff projections. ‘So far, I have not seen personally, and I think that the rest’ of the Executive Board has also not seen projections ‘beyond 2023.’