ECB’s de Guindos Urges that Fiscal Policy Not Stoke Inflation, Calls for Macroprudential Tightening
29 September 2022
By David Barwick – VILNIUS (Econostream) – European Central Bank Vice President Luis de Guindos on Thursday called on fiscal and macroprudential policy to complement monetary policy, and urged that macroprudential policy be tightened somewhat in the context of deteriorating growth prospects.
In a speech at the 100th anniversary conference of the Bank of Lithuania, de Guindos cited research supporting the wisdom of fiscal and monetary policy collaboration during a crisis, when ‘strong, discretionary countercyclical fiscal policy is needed’.
Research further indicates that fiscal policy is more effective when interest rates are near the lower bound, he said.
‘Structural fiscal policy could also help raise the natural or equilibrium real rate of interest’, he said. ‘This rate of interest has been falling in recent decades and has made the pursuit of price stability much more challenging for central banks.’
At this stage of the pandemic, fiscal measures should be different than they were, he observed. ‘Fiscal policy should not stoke inflation’, he said. ‘It needs to be temporary and tailored to the most vulnerable households and businesses, who are being hardest hit by high inflation.’
So that monetary policy can concentrate on its mandate, fiscal and macroprudential policy ‘should be the first lines of defence for economic stabilisation and fostering financial stability, respectively’, he said.
Fiscal and macroprudential policy have recently become more important, the former because of the crisis and interest rates’ proximity to the lower bound, and the latter because of its appropriateness to limit any negative fallout from monetary policy, he said.
Fiscal and macroprudential policy must be ‘strongly countercyclical’, he said.
De Guindos called for ‘[s]ome further careful and targeted tightening of macroprudential policy’ to be undertaken ‘in selected countries’.
‘Given the deteriorated outlook for economic growth, some countries might benefit from further increasing the resilience of their financial sectors before credit risks start materialising’, he cautioned. ‘This includes for example taking measures to preserve capital in the banking sector which could then be used to absorb losses.’
‘Of course, the benefits of further policy action across countries, would need to be evaluated against the risk of procyclical effects, which is becoming more likely as the economic outlook worsens’, he added.
Macroprudential policy ‘should consider the current near-term headwinds to economic growth since policy tightening should not result in an unintended tightening of credit conditions.’