Interview with Naftemporiki

Interview with Luis de Guindos, Vice President of the ECB, hosted by Michalis Psilos19 March 2024

Inflation is falling and the European economy is slowing down, especially the German economy. However, service sector inflation is stable and the labor market is still under pressure. President Lagarde announced at the last press conference that the ECB will have enough data to make a rate decision in June. What do you think is likely to be the likely downside? What would you like to see first? Is there a risk of a wage-price spiral in the near future that could delay a decline?

Looking at recent changes in inflation, we see a clear disinflationary process. This is reflected in both overall inflation and core inflation. The main risk is the combination of high wage growth, currently around 5%, and very low productivity. These two factors together could lead to a significant increase in labor costs. And this is a risk especially for services inflation because services are labor intensive and protected from foreign competition. In that sense, services inflation is persistent. And that's why we need to wait. Wage development is key, and most collective bargaining agreements will be concluded in the first months of this year. We will have more information in June.

What do you think the path will be when you start lowering rates? Will it be a sustainable path or will it be data-dependent? What might such a path mean for the existing financing environment, especially for mortgages and commercial real estate? Could it have an impact on banks?

Rates affect financing conditions. That's how monetary policy works. When rates rise, financing conditions become tighter and borrowing becomes more expensive - and it works the other way around as well. We haven't discussed anything about future rate movements yet. We need to get more information. We'll also have new projections in June and we'll be ready to discuss that. We are not date dependent - we are data dependent. We have to make a decision to adjust our monetary policy based on the data we have.

Is there a risk that your monetary policy may be too effective and perhaps inflation falls well below 2% in 2025 or 2026?

If you look at our forecasts, that is not the case. We forecast that inflation in 12-18 months will fluctuate around our 2% target, but we don't see the risk of it falling below that level. We need to see a steady, constant convergence of inflation to 2%.

How would you counter such an outcome, especially if it led to an unnecessary slowdown in the economy? Maybe an option would be to pause in reducing your asset purchase program (APP)?

It will all depend on the data. We have been very clear about what we will do with APP and the Purchase Emergency Program (PEPP). We have to remember that asset purchases, also known as quantitative easing or QE, was a response to an exceptional situation. Our main monetary policy tool is a set of key interest rates. But QE will remain part of our toolkit. And if we need it, we can use it again.

Do you think the ECB will have to wait for the first Federal Reserve rate cut or will you act independently? Is there a risk of a weaker euro if you act first, which could contribute to imported inflation?

We act independently.

Speaking of the Federal Reserve, Europe is facing an uncertain relationship with the United States because of the election in November. How do you feel about that?

We do not comment on the domestic political issues of other countries. We have great respect for democratic processes around the world. And, as you know, elections will also take place in Europe in June. We will do everything possible to cope with what different societies decide. The ECB is not involved in politics.

What stage is the digital euro currently in? Some people are suggesting a very low limit on the amount that citizens will be allowed to hold. What is the ECB's position on this?

The digital euro will be an extension of the physical euro. In a sense, we want to offer banknotes in a completely different form - instead of keeping them in our wallets, we can hold them in our phones in digital form. This will be a digital means of payment. The digital euro will not replace physical banknotes and will not be a form of investment. We will make decisions regarding the exact limits at a later stage. The main message is that the digital euro will serve a similar role to the physical euro.

Finally, I would like to ask you about Greece. How would you describe its economic situation? What is your view on the progress made by Greek banks, which were in a very difficult position a few years ago?

Greece is outperforming the rest of the eurozone and is reaping the benefits of the policies implemented during the crisis years, which were indeed tough. The Greek people have endured many hardships and made significant sacrifices. Now, the Greek economy is showing good results. Firstly, in terms of growth. Secondly, in the reduction of the fiscal deficit. And finally, in the decrease of the public debt level. At the same time, the situation of Greek banks is developing in parallel with the improvement of the economy. The banking system is much more resilient than it was six or seven years ago. However, there is no room for complacency. The level of public debt must continue to decrease, as it is still significantly higher than the average in Europe. And although Greek banks are in a much better position than before, they still need to continue cleaning up their balance sheets. Overall, Greece is on the right track.