ECB Brief: De Guindos Sees Higher Inflation for Longer; Wages and Expectations Critical

20 March 2022

By David Barwick – FRANKFURT (Econostream) – This is a quick take on comments made late Sunday by European Central Bank Vice President Luis de Guindos in an interview with German daily Handelsblatt.

  • De Guindos denied in standard language that the ECB had any exchange rate target, while noting the inflationary impact of euro weakness. However, he argued that the most salient example of weakness, euro-dollar, was reflecting safe-haven demand, and that the common currency was actually ‘quite stable’ versus the aggregate of the area’s trading partners.
  • Said: ‘We aren’t intervening in the foreign exchange market because we don’t target any exchange rate.’
  • Denied the possibility of stagflation, consistent with his remarks last Tuesday ruling out recession, but said inflation would probably remain elevated for longer than previously thought.
  • Indicated that for monetary policy it all comes down now to whether wage increases are ‘too high’, though there are no signs of this yet. Similarly, expectations are anchored near 2%, but need monitoring.
  • Stated flatly that the ECB would respond if inflation continued to surprise on the upside, with second-round effects and de-anchoring of expectations ‘the deciding factors. If we see those, then we will act.’
  • The delinking of rates lift-off from asset purchases was the most important outcome of the last monetary policy meeting, and now ‘interest rates will not need to be increased automatically after the end of net asset purchases.’ Lift-off ‘all depends on the data.’
  • Very openly urged fiscal policy to ‘play a role’ in cushioning the impact on firms and household of the price shock, which ‘would also reduce the danger of a wage-price spiral.’
  • Somewhat weakly defended the 2024 euro area HICP forecast of 1.9%, first noting that such an exercise is ‘particularly difficult’ at present and then saying that ‘one reason’ to think inflation could subside to such a degree so quickly ‘could be’ that energy inflation runs out of steam.