Guindos acknowledges the ECB’s mistake with inflation and expects more rate hikes

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The vice president of the ECB returns to position himself with the hard wing of the organization and makes it clear that the fight against the price crisis is not over

Just a week ago, the European Central Bank (ECB) decided to raise its interest rates by 50 basis points to 3% in its fight against inflation. And the market has long been counting on the body to make the same move in March. Now the vice president of the institution, Luis de Guindos, positions himself in the harder wing and opens the door to go one step further.

Christine Lagarde’s runner-up explained this Thursday that “the battle against inflation has not been won and I do not rule out further rate hikes after March”. In other words, it opens the door to interest rates of 4% or even a little more in the summer, compared to the 3.5% they would hold after the meeting in March with the expected new increase of another 50 basis points.

Guindos thus shows greater aggressiveness than Lagarde expected after the body’s last encounter. And he also positions himself as one of the first ECB members to admit the complete blunder with inflation forecasts since 2021, when prices started to recover. “Central banks and many other organizations have long believed that the rise in inflation was temporary. I have to admit: that was a mistake,” said the former Spanish economy minister in an interview with the German newspaper Süddeutsche Zeitung.

“We all underestimate the persistence of inflation,” he admits. And while he explains how the ECB already decided in December 2021 to halt its purchases within the program in light of the pandemic, he admits: “we should have started reacting even earlier.”

Eurozone inflation rejected January at 8.5%. It undoubtedly assumes some moderation from the peak of 10.6% reached in October last year. But it is still at a very high level. And the underlying value remains at a maximum of 7%. That is why the ECB has been forced to implement interest rate hikes of 50 basis points, above those of, for example, the US Federal Reserve (Fed), which cut rates to 25 basis points at their last meeting.

The ECB insists it will go game by game as the macroeconomic situation evolves. But pressure from the ‘hawks’ (as members of the ECB who advocate for more restrictive policies are called) is mounting to keep inflation at bay. There will be another increase in March. And, according to Guindos, “we’ll see what we’re going to do later, I’m not ruling out further rate hikes later on.”

Source: La Verdad

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