ECB’s de Guindos: Inflation Likely to Remain Higher for Longer Than Expected Pre-War
20 March 2022
By David Barwick – FRANKFURT (Econostream) – European Central Bank Vice President Luis de Guindos said late Sunday that inflation would probably stay higher over a longer time than anticipated before Russia attacked Ukraine.
In an interview with German business daily Handelsblatt, de Guindos dismissed fears of stagflation, observing that the even the most adverse growth scenario entertained by the ECB for this year entailed growth of more than 2%.
‘Inflation, however, is likely to remain higher for a longer period than expected before the war’, he added.
How wages react to high inflation is now critical, he said. There have not yet been signs of second-round effects, but close monitoring is needed here and with respect to still-anchored inflation expectations, he said.
According to de Guindos, the change in the wording of the ECB’s forward guidance was the ‘most important decision’ of the March monetary policy meeting, and meant that ‘interest rates will not need to be increased automatically after the end of net asset purchases.’
When the first rate hike will come ‘all depends on the data’, he said.
Fiscal policy should mitigate the impact of the current price shock and ‘provide temporary, targeted support to help reduce the burden’, he said. ‘This would also reduce the danger of a wage-price spiral.’
Although safe-haven demand for the dollar made the change in euro-dollar particularly visible, the common currency ‘has remained quite stable’ versus a basket of currencies of euro area trading partners, he said.
‘We aren’t intervening in the foreign exchange market because we don’t target any exchange rate’, he said.
That the ECB forecasts 2024 HICP to have returned to below 2% could be because ‘the significant increase in energy prices cannot last for too long’, he said. ‘Prices can stabilise at a high level, but no longer increase at the current high rate.’
The ECB would in any case be data-driven, and would react if inflation continued to surprise on the upside, he said. ‘All options are on the table’, he said. ‘Second round effects and a potential de-anchoring of medium-term inflation expectations will be the deciding factors. If we see those, then we will act.’