ECB’s de Guindos: Inflation Expected to Reach Target, but Outlook is Risky

29 April 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Vice President Luis de Guindos on Monday said that even with considerable risks around inflation, the 2% target would be reached in 2025.

In a speech at a Euro 50 Group meeting in London, the text of which was posted on the website of the ECB, de Guindos said, ‘While we expect inflation to return to our 2% target next year, the outlook is surrounded by substantial risks’.

Geopolitical developments in the Middle East, wage increases, and high profit margins were the main upside risks to inflation, he said.

‘Should tensions in the [Middle East] region escalate further, major trading disruptions and impediments to oil supplies could push up energy prices and freight costs in the near term, disrupting global trade’, he said. ‘Inflation could also turn out higher than anticipated if wages increase more than expected or if profit margins prove to be more resilient.’

On the other hand, downside contributors could be a ‘stronger-than-expected dampening impact of monetary policy on demand or an unexpected worsening of the economic environment in the rest of the world’, he said.

‘Although inflation dynamics are broadly heading in the right direction, our work is not yet done’, he said. ‘We expect inflation to fluctuate around current levels in the coming months.’

It was necessary to monitor whether underlying inflation continued to ease, he said, which called for attention to wages, productivity growth and profit margins.

Economic growth in the euro area was expected to resume at a moderate pace, but risks remained elevated, he said.

‘ECB staff currently see economic activity remaining subdued in the near term before gradually recovering over the course of the year’, he said.

The financial stability outlook was challenged by weaker growth and uncertainty about geopolitical events, he said.

‘We assess the outlook as fragile’, he said. ‘While risk pricing in financial markets has generally been characterised by low volatility, market sentiment remains vulnerable to sudden shifts in response to negative surprises.’