ECB’s de Guindos: The Longer Inflation is Above Target, the Greater the Risk of Second-Round Effects

4 November 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Vice President Luis de Guindos on Friday warned that persistently high inflation increased the danger of second-round effects.

In a speech at an event in Madrid, de Guindos said that ‘[w]ith inflation currently at elevated levels and expected to stay above our target for an extended period, monetary policy must remain focused on reducing support for demand and guarding against the risk of a persistent upward shift in inflation expectations.’

‘The longer inflation levels stay above our target, the greater the risk of second-round effects – through wage increases or the de-anchoring of inflation expectations’, he continued. ‘Amid the present uncertainty, future decisions on policy rates will continue to be data-dependent and follow a meeting-by-meeting approach.’

European monetary authorities in any case ‘expect to raise interest rates further’, he said.

De Guindos observed that despite some easing, which was expected to continue, supply constraints continued to boost consumer prices, along with pent-up spending on services and the euro’s weakness. ‘Price pressures are evident in more and more sectors, in part owing to the impact of high energy costs feeding through to the whole economy’, he said.

Both inflation and growth would increasingly suffer from the energy shock, he said, as the higher prices reduced real disposable income and production.

‘At the same time, we may still see delayed pass-through of the past increases in wholesale energy prices to consumer prices which, together with recent geopolitical events, point to continuing upward pressures to the inflation energy component’, he said.