ECB’s de Guindos: Whether Rate Hikes End in July Hinges on Data; Underlying Inflation Critical

25 June 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank Vice President Luis de Guindos on Sunday said that the end of rate hikes was not far and that whether it would be reached in July depended on incoming information, in particular with respect to underlying inflation.

In an interview with Spanish national daily ABC, de Guindos said that the effects of past rate hikes ‘are beginning to pass through to financing conditions, with a significant decline in the demand for credit affecting real economic activity. If this slows down, so will inflation. The finishing line is in sight.’

Whether rate hikes would end before summer holidays, presumably meaning no later than the 27 July Governing Council meeting, ‘will depend on the data’, he said, reiterating that tightening to date was having a visible impact.

However, the ECB needs to be certain that it sustainably restores price stability, he said. ‘What happens with underlying inflation is paramount’, he added.

Headline inflation was shown by the latest forecast to be ‘clearly’ on the wane, in contrast to underlying inflation, he said.

‘The labour market is robust and, although wage growth is in line with our projections, productivity is slowing, resulting in an increase in unit labour costs’, he said. ‘This is essentially what explains our higher underlying inflation projection. In the medium term, headline and underlying inflation will no doubt decline, but we haven’t yet reached our price stability target.’

Previous monetary policy decisions, along with base effects, will help control underlying inflation, whilst the ECB has to watch second-round effects, wage developments and unit labour costs.

‘If the situation deteriorates, monetary policy will have to act more forcefully’, he said. ‘Fiscal policy must also play a part if we are to reduce inflation.’