Luis De Guindos has warned that in the Eurozone core inflation will continue to be "strong", that is, high throughout this year, despite the fact that at the same time the CPI is expected to fall "considerably", thanks to the lower energy prices.

In his speech to The European House-Ambrosetti Workshop in Italy, the Vice-President of the European Central Bank also predicted "a tightening of lending criteria" as well as a "slowdown in the growth of lending volumes" by banks, despite the fact that financial institutions in the euro area have "strong capital and liquidity positions, well above the minimum requirements'. In other words, a special precaution on the part of banks in terms of liquidity could soon limit credit and, as a consequence, also economic growth in the Eurozone.

According to De Guindos, core inflation, which does not include energy prices and unprocessed food, will continue to grow in 2023, reaching its peak this year, due, among other things, to the foreseeable wage increases, demanded by workers to compensate for the recent double-digit inflation. This forecast by the Vice-President of the ECB refers to the euro area as a whole, but it turns out to be even more appropriate for Spain, where last March the CPI fell to 3.3% (while in the euro area it only fell to 6.9%), but core inflation stood at 7.5% (one tenth less than in February). while it was estimated at 5.7% in the 20 states that share the single currency.

In his speech in Italy, De Guindos has made it clear that "there are no clear signs" of a "spiral of wages and prices". However, the number two of the ECB has pointed out that "the growing wage increases" in the whole of the Eurozone constitute one of those "risks" that "need to be controlled". According to De Guindos, "unemployment is low, and people feel secure in their jobs", but "compensation for (recent) high inflation is the main issue in negotiations for wages", whose nominal amounts "are expected to rise" in 2023.

De Guindos has also mentioned the "(business) profits" among the current causes of inflation, and has assured that the ECB "is monitoring them closely". "Profit margins have grown much more than labour costs, in some economic sectors," said the Vice-President of the European Central Bank. In his opinion, the set of "high profit margins", wage increases and inflation "are likely to cause lasting risks" of price increases, which would also be helped by any higher-than-expected economic growth in China. De Guindos has clarified that this would be "positive", but, at the same time, it could increase the prices of raw materials.

Likewise, the former Spanish minister has urged the governments of the EU States to "begin" the lifting of the budgetary measures they adopted last year to alleviate high inflation, which as a whole amounted to almost 2% of GDP, and, in the absence of cuts, are expected to reach that same level this year as well. De Guindos believes that those measures "tend to reduce inflation in the short term", but will have the opposite effect when they begin to be lifted in 2024, causing a greater rise in prices that same year and in 2025.

De Guindos in Italy recalled that the main (and institutional) objective of the ECB is price stability in the medium term, that is, an inflation rate in the Eurozone of 2% within a couple of years. Frankfurt will continue to pursue this objective through likely further interest rate hikes, albeit on the basis of data, including on core inflation and monetary policy pass-through, i.e. banks' effective lending capacity.

Financial turbulence

"Financial stability is essential to the ECB's primary objective of price stability," said De Guindos, who praised the EU's banking union, established over the past decade, to prevent further systemic crises. The situation of banking in the EU "is very different from that of 2008 or 2009 (when the serious international financial crisis caused by subprime mortgages in the US occurred)," said the ECB Vice-President. "The banking sector in the euro area is resilient," added De Guindos, implying that, in principle, European financial institutions should be substantially protected from the consequences of the bankruptcy of Silicon Valley Bank in the US and the last-minute rescue of Credit Suisse by UBS in Switzerland.

Even so, De Guindos himself has argued that those "recent events in the financial markets have increased uncertainty, which could hinder the transmission of our monetary policy in the Eurozone." Therefore, in addition to a possible credit crunch, the ECB vice-president does not rule out a possible "drop in consumer and investor confidence", as well as "lower demand" in the euro area. However, the former Minister of Economy of Spain believes that "it is too early to draw conclusions about the impact" of all that "on growth and inflation" in the same Eurozone.

"In our March forecast the growth outlook (in the euro area) was revised upwards, to an average of 1% for 2023," explained the ECB Vice-President. "However, these forecasts had been finalized before the recent (banking) developments of recent weeks, which now add uncertainty to our valuations." In any case, according to De Guindos, short-term growth prospects "remain weak".

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