The director of economics, Óscar Arce, announces that the institution will raise interest rates again at its next meeting, although he acknowledges that inflation will still remain at “very high” levels in 2023.
The International Monetary Fund (IMF) and the OECD had already warned about it in recent days, but now it is the European Central Bank (ECB) itself that is recommending euro countries that the fiscal measures they are taking are “the most targeted possible. The ECB’s Economics Director, Spaniard Óscar Arce, assures that now is the time to “turn on” fiscal policy to mitigate the most adverse effects of inflation and the energy crisis.
In his view, tax cuts should target those groups – households and businesses – most affected by this rise in inflation because they are coping with it from a more vulnerable position. “For the efficient use of public resources and to maintain the stability of public finances,” Arce explained at a conference organized by the APIE in Madrid on Thursday.
A price crisis that the ECB is trying to solve by raising interest rates. Arce acknowledged that “a further rate hike is expected at the next meeting” of the ECB’s Governing Council, although they will base the decision on the most up-to-date information coming in. “Now you have to go game by game, or meeting by meeting, in a very different way than what was done in the previous phase,” he said.
Despite these expected increases, the ECB is aware that the monetary policy measures taken today will only show their full effect in one or even two years. But Arce indicated that raising rates makes it possible to “anchor” economic agents’ expectations on the path of returning to the path of 2% inflation. “The signaling effect is also very important and has a direct impact on the price of raw materials and wages,” explains the Director of Economy of the European institution.
Inflation that is currently at its all-time high (the eurozone average rose to 10% in September), with nearly half of its weight being explained by the energy component. Arce indicated that in addition to energy, there is actually core inflation (which does not take into account energy or fresh produce), which is at very high levels and “the end of the rise is not in sight”. For this reason, they assure the ECB that we have a period ahead of us “that will not be short” with “very high” underlying inflation rates.
So inflation will remain at “very high” levels for the rest of the year, and although it will start to moderate in 2023, it will still be very high in 2024. In addition, Arce warned that some long-term metrics are beginning to decline, pointing to inflation closer to 3% than 2% by 2024.
In Spain, huge tax cuts are being implemented, among other measures that affect the population as a whole, contrary to what the ECB is asking. This is the case with the VAT reduction on electricity and gas, or the 20 cent discount on fuel or the free shuttle trains. The State Secretary for Finance, Jesús Gascón, has justified this in the “extremely positive” evolution of the collection. “All these measures can be financed by collecting, otherwise it would be totally impossible because you have to have a balance between income and expenditure in order not to create a bigger deficit,” explains Gascón.
He even recalled that a year ago no agency trusted the Treasury to meet the expected deficit figures, and it has been possible to do so despite this government spending policy. And it is that the forecast is that the year will close with 9.3% higher tax revenue than last year, and next year this increase will be 7.7%. In addition, Gascón acknowledged that these forecasts are “very cautious”, as the growth rate was already 18% in August.
Source: La Verdad
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