"Wage increases are so far quite prudent"

Rosalia SanchezFOLLOW, CONTINUE
Updated: 04/28/2022 12:03 a.m.
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The European Central Bank must closely monitor the recent increase in
inflation expectations above its 2% target, but wage growth, a key requirement for lasting inflation, remains subdued, ECB Vice President Luis de Guindos has said. The institution remains confident of a rapid decline in inflation in the second half of the year, but De Guindos acknowledges that there is growing concern that some of the inflation will persist beyond the current crisis, keeping prices growing. above 2% in the coming years. "However, inflation expectations have increased in recent months and the initial signs of revisions above the target in these measures justify close monitoring," he declared in his first face-to-face appearance before the Economic Commission of the European Parliament.

He has argued that there are no signs that high consumer price growth is seeping into wage-setting dynamics, a potentially worrying sign that would suggest persistent inflation. "So far, wage increases are quite cautious and fully consistent with the objective of price stability," he has said. And with price growth likely to remain high for longer, the ECB will continue to "normalize" policy, first ending bond purchases and then considering rate hikes, de Guindos said, repeating permanent guidance. of the ECB.

This policy could increase the risk of a sharp increase in yields, but the ECB is ready to contain an unjustified widening of spreads between debt instruments from the center and the periphery of the bloc, de Guindos added, thus downplaying a possible crisis in risk premiums. "We have discussed the general implications of fragmentation," he added, "we have not discussed any particular instrument ... but I can assure you that we are ready to act."

According to this report by de Guindos, the ECB believes that recent events indicate that economic growth in the eurozone will be slow and the victim of a loss of economic confidence.

“Rising energy prices are reducing demand and increasing production costs. The war is also weighing heavily on business and consumer confidence and has created new bottlenecks," he said, stressing that supply problems are "exacerbated" by new anti-pandemic restrictions in Asia. “These events point to slower growth in the next period”, he has put on the negative balance, while on the positive side he has highlighted that “there are factors that will support growth, such as the strength of the labor market and the reopening of some sectors ».

Regarding inflation, the former Spanish minister reiterated that "price increases will probably continue to be high in the coming months, above all due to the marked increase in energy costs" and that "in the medium term, most surveys and expectations point to inflation rates around our target of 2%”, by which the ECB is governed. For the ECB "there are many factors that complicate the outlook for growth and inflation" and "high uncertainty", so in this context its monetary policy "is guided by the principles of optionality, gradualism and flexibility".

The night before these statements, the president of the ECB, Christine Lagarde, hinted that the first rise in interest rates could take place as of July, but de Guindos has not given any additional clues in this regard. At its meeting on April 14, the Governing Council confirmed that its debt purchases will conclude in the third quarter of the year, depending on the data and the evolution of the outlook, and that interest rates will change "some time after » from the end of these acquisitions and in a «gradual» way.

"We are ready to adjust all the instruments within our mandate, incorporating flexibility if justified, to ensure that inflation stabilizes around our 2% target in the medium term," de Guindos limited himself to saying, adding only that combining monetary and fiscal policy “remains critical, especially in the difficult geopolitical situation”, and considering that fiscal measures must increasingly focus on helping vulnerable households and provide incentives to reduce dependence on Russia.

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