ECB’s de Guindos: Increase in Expectations ‘Quite Pervasive’; 25 Basis Points in July ‘Done’

24 June 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Vice President Luis de Guindos on Friday painted a gloomy economic picture, but although he sounded concerned about inflation expectations, he refused to entertain the possibility that the ECB would hike by more than 25 basis points next month.

In a panel discussion in Zurich, de Guindos hinted at the possibility of negative economic growth in 2023 and said that ‘the terms of trade of the European economy have deteriorated quite a lot.’

‘So, over the next months, if you’re asking my opinion, I think that it’s quite clear: we are going to have high inflation, because inflation is going to be hovering around the present levels over the next months’, he said. ‘We expect that it will start to decline in the last quarter … of the year, but it will be above 6%. And simultaneously, well, growth is going to, to decelerate. So, this is not the ideal framework, as you can imagine, for monetary policy and for fiscal policy, no?’

It was ‘quite clear’ that inflation expectations had risen, he said. ‘It has been quite pervasive, quite common, but I would not say that they are de-anchored at all. My impression is that, you know, inflation expectations for 2024 are slightly above 2%.’

His ‘main concern’ was second round effects, given that ‘we have started to see that wage claims are on the rise’, he said. ‘So far, you know, the situation is moderate, but I think that we have to be very careful, because it could modify … our projections in the future, and you know, to avoid this spiral, I think this is going to be crucial for us.’

De Guindos declined to specify his view of the neutral interest rate, suggesting the ECB was not preoccupied with this, ‘perhaps because it could be, you know, interpreted as … the landing zone … of interest rates.’

He rejected the idea that the rate hike of 25 basis points flagged for next month was subject to change.

‘Well, the communication is firm, and, you know, I am not going to modify the communication because I think that, you know, the 25 basis points for July are done’, he said. ‘What happens later on, well, we will see. In September it will depend on the outlook.’