Eurozone inflation may temporarily rebound, warns ECB’s Guindos
EUROPEAN Central Bank Vice President Luis de Guindos warned that consumer-price growth may pick up again temporarily, though its prevailing direction is downwards.
Speaking to the Frankfurt Euro Finance Week on Monday (Nov 13), he said that the eurozone economy will stay subdued for now though it should then strengthen again, while there are signs that the labour market is starting to weaken.
“We expect a temporary rebound in inflation in the coming months as the base effects from the sharp increase in energy and food prices in autumn 2022 drop out,” de Guindos said. “But we see the general disinflationary process continuing over the medium term.”
Euro-area inflation is at its weakest in two years, though at 2.9 per cent it’s still above the ECB’s 2 per cent goal. Officials have warned of a difficult “last mile” back to price stability as government aid to cope with the cost-of-living crisis is withdrawn and workers’ salaries rise. He acknowledged risks on the horizon.
“Energy prices remain a major source of uncertainty amid heightened geopolitical tensions and the impact of fiscal measures,” he said. “The same is true for food prices, which may also come under upward pressure owing to adverse weather events and the unfolding climate crisis more broadly.”
After a record tightening spree, the ECB is probably at its rate peak. Policymakers including President Christine Lagarde have said that borrowing costs will stay at the current level for some time, though markets are betting on a cut in April.
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“We consider that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal” of taming inflation, de Guindos said.
He pointed to new ECB forecasts due at the December decision that will put officials in a “better position to reassess the inflation outlook and required policy action.”
Before that, the European Commission will on Wednesday publish new projections for the region, which the Governing Council may look to for a view on the risks ahead.
He also said that while eurozone economic growth will remain weak in the near term as services and the labour market weaken, nations in the bloc should not free discretionary bank buffers to ease the pain.
Some of the eurozone’s biggest countries have implemented a so-called counter-cyclical buffer, which forces lenders to set aside more capital during better times, which could then be released when the economic cycle turns.
“Macroprudential authorities should preserve releasable capital buffers to ensure that they are available in the event that conditions in the banking sector deteriorate,” de Guindos said.
Germany and France both implemented such buffers this year and France plans to increase it from the start of next year while the Netherlands announced plans to double the buffer next May.
A potential concern is that the eurozone economy has been broadly stagnating all year and any recovery next year will be shallow, keeping growth below 1 per cent.
“Weaker industrial activity is spilling over to services,” de Guindos said. “It is likely that the euro area economy will remain subdued in the near term.”
Even the labour market, the bright spot in the bloc’s economy, has started to show signs of weakening, de Guindos added. BLOOMBERG, REUTERS
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