Financial Instability Might Dampen Demand and Sentiment, ECB’s de Guindos Says
1 April 2023
By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Vice-President Luis de Guindos said on Saturday that recent financial may lead to a drop in consumer confidence and lower demand.
Speaking at a conference organised by Ambrosetti Group in Cernobbio, Italy, he said that there were a number of upside risks to the euro area inflation outlook worth monitoring, including wages and profits, China’s reopening and fiscal support measures.
‘Recent events in financial markets have heightened uncertainty, which may hamper the transmission of our monetary policy across the euro area’, he said. There was likely to be an ‘increase in banks’ cost of funding, a tightening of credit standards and a deceleration in the growth of lending volumes’ as a result, along with a ‘drop in consumer and investor confidence and lower overall aggregate demand’, he said.
However, it was ‘too early to draw conclusions about the impact all of this will have on growth and inflation’, he said.
The ECB had ‘to pay particular attention to factors that could pose upside risks to inflation', he said. These included rising wage growth, though he noted that there were ‘no clear signs of a self-sustaining wage-price spiral’. The ECB was also ‘closely monitoring underlying inflationary pressures stemming from profits’, he said. ‘The feedback between higher profit margins, higher wages and higher prices could pose more lasting upside risks to inflation.’
Developments in China ‘could boost foreign demand and add to commodity price pressures’, he said.
The ECB also needed to pay heed to fiscal support measures, he said. ‘Fiscal measures tend to reduce inflation in the short term, but we expect the opposite to be true as they start to be withdrawn in 2024, leading to higher inflation in 2024 and 2025.’
The Governing Council would ‘remain data-dependent’, he said, reiterating the guidance from the ECB’s latest monetary policy decisions. He added that ‘headline inflation is likely to decline considerably this year, while underlying inflation dynamics will remain strong.’