Principal Quote of ECB’s de Guindos

12 June 2024

By David Barwick – FRANKFURT (Econostream) – Following is the principal quote from the livestreamed MNI Connect event on Wednesday with European Central Bank Vice President Luis de Guindos on Wednesday:

‘The disinflationary process has been quite profound, quite intense. And even if you look at core inflation - that is a little bit below 3% - all the measures that we have of underlying inflation go in the same direction, that inflation is going to decline. In our projections … we [revised] up a little bit the outlook for growth. It was a marginal increase, because growth for ’24 is going to be, according to the projections, 0.9%, a little bit below 1%, clearly below the potential of the euro area. And we also [revised] up a little bit both headline and core inflation for ’24 and ’25. But the changes were quite marginal. But let me say something, because I can understand a little bit the surprise of having a rate cut and simultaneously … to release projections with higher inflation. … We knew perfectly at the beginning of the year that from April, May until year end, the evolution of inflation is going to be bumpy, it’s going to be complicated, it's going to be hovering around the levels that we have now, headline around 2.5%, core a little bit below 3%. So, it was not a surprise for us. It confirmed our confidence that inflation will converge in ’25, at the end of ’25, to the level that defines our price stability objective. … Having said that, and looking at the future, let me say something that in my view is relevant. The future is going to be complicated. … Base effects are going to be relevant, and we have another element of uncertainty. That is going to be the evolution of the – you know, the main risk for the inflation outlook is going to be services inflation, what we call domestic inflation. In that respect, we have to analyse what’s happening in the labour market. Wage dynamics are very relevant. Yesterday we had some data from the European Comission about compensation per employee. It was in the area of 5%. You can say, “Well, is this compatible with bringing down inflation to 2%, 5% compensation per employee?” What I have to tell you in that respect is that this is exactly the assumption that we had in our projections for the first quarter of this year. Nevertheless, our projection is that compensation per employee will start to decline and will start at the beginning of next year in the area of 3.5%. The second element that we try to take into consideration that I think is very important and that we are paying a lot of attention [to] is the evolution of productivity. The evolution of productivity in Europe has been very thin, even in some quarters negative. And so the combination of wage increases in the area of 5% plus with very low productivity gives rise to unit labour costs that are a real threat, mainly in the … services sector. In 2023 … the rise in unit labour costs was mainly compensated by profit margins. … And we believe as well that is what is happening now at the beginning of ’24, margins and profits, they are absorbing part of the increase in unit labour costs. And so, you know, the inflationary pressures will start to be partially compensated by the reduction of … profit margins. On top of that, you have all the geopolitical risks. … So, that's why we wanted to send a very clear signal in terms of the future actions that we are going to take. And the level of uncertainty is huge, we have a lot of question marks. And that’s why, when you are, you know, in a dark room, you have to be very careful. You have to only, you know, to move very slowly, to move with a lot of prudence and to try to clarify … what might be … the future. … the main message is that that we do not have any sort of predetermined path … over the next the next six months, because I think that that's the … correct approach. I understand perfectly that markets want to have … forward guidance … but it could be, you know, be careful when someone in the circumstances gives you any sort of very specific concrete guidance about the future evolution of monetary policy, because for sure that he's going to try to cheat you or he doesn't know anything about, you know, what might happen in the future.’