Vice President of the European Central Bank, Luis de Guindosconsiders that the inflation general of the eurozone, which rebounded one tenth last April to stand at 7%, will end up falling but sees “worrying & rdquor; the high level of Underlying inflation -which excludes the effect of energy and fresh food prices- and particularly the increase in the prices of the services. It is one of the messages that has been left behind this Thursday by the economic affairs commission of the European Parliament where he has defended, like this Wednesday the Community Executive, a withdrawal of the aid for the energy crisis to avoid an increase in inflationary pressures in the medium term.
“An important factor for future inflation prospects is the behavior of the fiscal policy. As the energy crisis subsides, governments should withdraw the corresponding support measures quickly and in concert to avoid increasing inflationary pressures in the medium term, which would require a more forceful monetary policy response,” he explained during his intervention. According to De Guindos, the governments of the eurozone must direct their fiscal policies to make the economy more productive and gradually reduce the high public debt.
According to the diagnosis of number two of the ECB, headline inflation decreased from the peak registered last October to 7% in April although core inflation remains elevated, partly due to pressures on input costs. The upside risks for inflation are derived, among other things, from higher-than-expected growth in wages and profit margins, as well as a possible lasting increase in long-term inflation expectations above the 2% target. The downside risks, meanwhile, are due to a possible return of the “tensions in the financial markets & rdquor; and the “weakening of demand”, due, for example, to a more pronounced slowdown in bank credit or a greater transmission of monetary policy.
This scenario led the ECB to increase interest rates by a quarter of a point at its last meeting in May and to announce the interruption of reinvestments within the framework of the asset purchase program from the month of July. De Guindos has not given any clues as to what decisions the meeting body will make at its next meeting but recalled that they will be aimed at guaranteeing that “official interest rates are at sufficiently restrictive levels to achieve a return of inflation to our target at medium term of 2% and remain at these levels for as long as necessary,” he indicated.
“Solid” banking system
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Despite the tightening of financing conditions, which the banker acknowledges is putting companies, households and countries in the Eurozone to the test, the ECB considers that the banking system is “solid & rdquor; as evidenced by the recent tensions following the Bank failures in the United States and Switzerland. “These effects were mitigated by the solidity of the fundamentals of the banks in the area & rdquor ;, he said. Still, he has been concerned about wild swings in property prices, especially in commercial real estate, and has urged banks to start starting remunerate deposits. “If we increase interest rates, we increase them for everything: loans and deposits. The bank has to react& rdquor ;, he has warned.
De Guindos has also taken the opportunity to underline the “need to strengthen the regulation of non-banking entities & rdquor; and avoid the risk of creating blind spots within the financial system. “Our banking sector is strong, largely thanks to the reforms and prudential policies implemented in recent years & rdquor; but “recent events should remind us that we must constantly adapt our regulatory framework to changing times & rdquor ;, he added, urging governments to complete the banking union. “The best way to protect stability in the EU is to ensure further European integration and a strong regulatory framework. In the next twelve months, before the end of this legislature, we can make tangible progress on some key files & rdquor ;.