ECB Insight: De Guindos Attempts to Beat Back Dovish Expectations

2 October 2023

By David Barwick – FRANKFURT (Econostream) – The European Central Bank must have realised when it chose to hike rates on 14 September that a move of such dubious necessity at this stage of the tightening cycle would inevitably give rise to a need for interviews like that of Vice President Luis de Guindos on Monday.


Speaking to the Financial Times, de Guindos was at pains to convey the message that it shouldn’t be taken for granted that the ECB was done raising borrowing costs. Asked straightforwardly whether ten consecutive hikes were enough, de Guindos embarked on a critique of policy transmission to the real economy whose undertone was that the ECB still wasn’t convinced that a significant part of its efforts hadn’t just been spitting in the wind.


A bit odd, that. After all, ECB President Lagarde two and a half weeks ago specifically cited ‘the increasing impact of our tightening on domestic demand’ in explaining the ‘significantly’ lower growth outlook of the updated macroeconomic projections.


Odd, too, the Vice President’s contention today that transmission is ‘sometimes slightly overlooked’, as if Lagarde hadn’t used some form of the word 16 times during the 14 September press conference, including in response to a question on the very issue.


But okay, we get it – de Guindos mainly just wanted to undercut the notion that the ECB was necessarily done hiking by letting us know that the intensity of policy transmission to the real economy would be ‘[t]he key point that will determine our future decisions’.


Still, we don’t entirely see how the ECB would justify further hikes simply because what de Guindos called ‘other factors’ such as real losses in household disposable income and slower exports are behind the economic weakening, rather than all the monetary tightening to date. We understand that Chief Economist Philip Lane may make himself formally available to media tomorrow, and look forward to his explanation.


As for de Guindos’ attempt to beat back expectations of early policy loosening, his conclusion may have undermined his preceding effort a tad. From highlighting policy transmission to the real economy as the key determinant of future Governing Council decisions, he seamlessly reverted to the platitude that ‘the present level of interest rates, if maintained over time, will give rise to a reduction in inflation towards our definition of price stability.’


Indeed, if anything, that may have gone a wee bit further than Lagarde’s less promising formulation, in which current rates were expected to make a ‘substantial contribution’.


And the southern European that de Guindos after all is shone through when he described the ECB’s task thusly: ‘We must bring inflation to our definition of price stability while simultaneously trying to minimise the pain that could create in terms of a slowdown in the economy.’


As if that weren't enough, his insistence that ‘[s]tarting to talk about rate cuts now is premature’ rang a bit hollow, inasmuch as in the very same breath he provided reasonably clear guidance as to what it would take not merely to talk about rate cuts but to actually implement them:


‘First of all, progress in a very steady way towards our definition of price stability, i.e. to inflation of 2% along with projections indicating it will remain at that level in a sustainable way’, he said.


So, while the ECB will have foreseen that its decision in favour of a rate hike that could well turn out to be superfluous would necessitate a certain amount of counter-steering against the dovish expectations thus engendered, we are not sure that this interview will prove a success by its own measure.


But then, we are also not entirely convinced that, as de Guindos would have us believe, ‘the last mile [in restoring price stability] will not be easy.’


On the contrary, we suspect December may bring an initial 2026 forecast even more clearly in line with the ECB’s target than the current projection of 2.1% HICP for 2025, already considered by many to be close enough, and wonder in this case how well the ECB's insistence on keeping all discussion of rate cuts at arm's length will hold up.