On Wednesday, ECB Vice President Luis de Guindos said the central bank needed to keep inflation expectations anchored. In a report published Wednesday, the ECB said households and businesses were under pressure from high rates, a poor economic outlook and monetary tightening; but government support needed to be \u201ctargeted.\u201d
De Guindos said there needed to be \u201ccautious\u201d quantitative tightening and downplayed the risks of a new European debt crisis. It is crucial for the ECB to convey its adherence to bringing prices down in order to keep inflation expectations anchored, according to its vice president.
Luis de Guindos also noted that the main risk of a wage-price spiral was the perception that the central bank\u2019s credibility was not strong enough. \u201cThat\u2019s why we are making such a commitment with price stability \u2026 and that we will do whatever is necessary in order to reduce inflation to the level that we consider as price stability, which is 2%,\u201d he added.
But, he added, the lesson from the stagflation seen in the 1970s was that monetary policy needed to be focused on avoiding second-round effects.
Eurozone inflation is running at 10.7%, the highest level in the bloc\u2019s history, and the ECB has hiked its benchmark rate to 1.5%, a level not seen since 2009, before the sovereign debt crisis.
De Guindos also said he could not specify what the ECB\u2019s terminal rate would be, even though markets were \u201cdemanding guidance,\u201d but the central bank had to \u201csay very clearly that we are going to do our job, that we will reduce inflation, and that we will raise rates to the level that is compatible with the convergence of inflation to our price stability definition.\u201d
The ECB on Wednesday published a Financial Stability Review which outlined challenges facing businesses and households from the poor economic outlook, high inflation and monetary tightening.
It argues governments need to provide vulnerable sectors with targeted support without interfering with the normalization of monetary policy. Economists predict the Eurozone is heading for a deep recession amid plunging consumer confidence.
De Guindos said banks needed to be \u201ccautious and prudent,\u201d avoid being blinded by a short-term increase in profitability due to higher interest rates, and prepare for the potential coming rise in insolvencies and the reduced repayment capacity of households.
The tight labour market, with unemployment at an all-time low, was a \u201cpositive factor\u201d \u2014 but not guaranteed to continue in the future, he continued.
However, he downplayed risks of the kind of fragmentation in the euro area that could be an early indicator of another debt crisis, noting spreads between sovereign bonds had not been widening significantly in recent months and that the ECB had new anti-fragmentation instruments ready to deploy.
He also said Eurozone countries had not seen the \u201ckind of accidents we saw in the U.K. with the mini-budget,\u201d and he hoped they would not.
A swath of unfunded tax cuts and growth-supportive measures announced by the U.K.\u2019s short-serving prime minister Liz Truss, which came as the Bank of England was raising interest rates and set to begin bond selling, caused havoc in the gilt market and nearly caused pension funds to collapse.
As for quantitative tightening, de Guindos noted, \u201cMy personal view is that we have to be careful. It has to take place, it has to be part of the normalization process of monetary policy, but simultaneously, given the level of unknowns with respect to the potential consequences of QT, I think that we have to do it very carefully.
\u201cIt should be a sort of passive QT, and trying to reinvest only a percentage of the maturities of the bonds that we have in our portfolio in different time horizons\u201d, according to de Guindos.<\/p>\n","protected":false},"excerpt":{"rendered":"
On Wednesday, ECB Vice President Luis de Guindos said the central bank needed to keep inflation expectations anchored. In a report published Wednesday, the ECB said households and businesses were under pressure from high rates, a poor economic outlook and monetary tightening; but government support needed to be \u201ctargeted.\u201dDe Guindos said there needed to be …<\/p>\n","protected":false},"author":13,"featured_media":71073,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[6827,49,37,36],"tags":[6923,6837,6987,7822,7580,8529],"class_list":["post-75776","post","type-post","status-publish","format-standard","has-post-thumbnail","","category-daily-economic-reports","category-economic-reports","category-forex-markets","category-market-updates","tag-ecb","tag-eurozone","tag-inflation","tag-labour-market","tag-monetary-policy","tag-quantitative-tightening"],"_links":{"self":[{"href":"https:\/\/noortrends.ae\/en\/wp-json\/wp\/v2\/posts\/75776","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/noortrends.ae\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/noortrends.ae\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/noortrends.ae\/en\/wp-json\/wp\/v2\/users\/13"}],"replies":[{"embeddable":true,"href":"https:\/\/noortrends.ae\/en\/wp-json\/wp\/v2\/comments?post=75776"}],"version-history":[{"count":2,"href":"https:\/\/noortrends.ae\/en\/wp-json\/wp\/v2\/posts\/75776\/revisions"}],"predecessor-version":[{"id":75782,"href":"https:\/\/noortrends.ae\/en\/wp-json\/wp\/v2\/posts\/75776\/revisions\/75782"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/noortrends.ae\/en\/wp-json\/wp\/v2\/media\/71073"}],"wp:attachment":[{"href":"https:\/\/noortrends.ae\/en\/wp-json\/wp\/v2\/media?parent=75776"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/noortrends.ae\/en\/wp-json\/wp\/v2\/categories?post=75776"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/noortrends.ae\/en\/wp-json\/wp\/v2\/tags?post=75776"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}