Luis de Guindos says plan to control risk premiums will leave agency “hands-free” to fight inflation
The recession drums that have been pounding the markets for weeks are getting closer and closer. Investors have been warning for weeks about this possibility that even the European Central Bank (ECB), which is in the process of withdrawing its stimulus to fight inflation, cannot ignore it.
The president of the organization, Christine Lagarde, assured the European Parliament a few days ago that this scenario is not currently the reference by which the organization is working to develop its monetary policy. But his vice president, Luis de Guindos, was a bit more specific yesterday, acknowledging the possibility that the risks facing the economy after the war in Ukraine will consolidate in the coming months, leading to an unfavorable scenario, where a recession is already underway. considered by 2023.
Speaking at the APIE summer courses in Santander, Guindos recalled that the central scenario is one of positive growth in the eurozone of more than 2% this year and next. But he acknowledged that GDP declines are also being considered for next year in the event of a worse-than-expected environment with inflation and commodities supply problems already having a full impact on consumer incomes.
This adverse scenario managed by the ECB has been at the heart of financial giants like Morgan Stanley for months, given the constant rise in oil prices and agricultural commodities. In a recent report, analysts warned that if prices rise more than expected, the entry into a “outright recession” will be inevitable. And Luis de Guindos admitted yesterday that the runaway 8.1% inflation in the eurozone in May was a real negative surprise for the institution.
The Morgan Stanley scenario is that of an increase in the price of a barrel of Brent oil, a benchmark in Europe of $150, which would be added to a 20% increase in agricultural commodities. This would reduce consumption and investment and “in the absence of fiscal policy to soften the blow” would reduce eurozone GDP by 1.1 percentage points more over the next four quarters, “with a recession lasting until the first of 2023”, they indicate.
In the same vein, BlackRock has stated in its latest market report. The US investment giant, with extensive exposure to Ibex-35 companies, believes the ECB will even be forced to review the pace of rate hikes by “underestimating the risk that the energy crisis will lead to a recession”.
At present, it is clear to the world’s central banks that their main objective is to control inflation. This has a direct impact on the pace of the economic recovery. Guindos explained yesterday that the ECB already expects inflation to remain at levels similar to its current level, above 8%, and only begin to relax after the summer months, ending at around 6% in 2022.
In this sense, the Spanish economist pointed out that while inflation expectations are relatively well anchored, very close to 2% over the medium term, there is a second element, which is second-round factors. “If we find second-round effects, it will lead to inflation getting higher and affecting more components of the CPI and the monetary policy response will be different,” he warned.
In other words, if the situation worsens, the 25 basis point rate hike expected for the July meeting will be followed by another, stronger hike in September. In fact, Guindos has not wanted to define the ceiling to which this new cycle can reach.
The simple expectation of a change in monetary policy has led to strong tensions in the debt markets of the countries with the largest imbalances, including Spain but especially Italy.
In this environment, the ECB has committed itself to developing the “anti-fragmentation mechanism” (when some countries’ risk premiums are not justified by economic confidence), which will in fact translate into a new program to continue buying bonds from these countries . countries if necessary, while the agency withdraws the current one.
Guindos has made it clear that “the anti-fragmentation program should not interfere with the approach to monetary policy and the fight against inflation”. It is confident that this plan will leave hands free to meet the symmetric 2% inflation target over the medium term. “Having an anti-fragmentation tool frees up monetary policy to act more vigorously against inflation,” he assured. However, he noted that this doesn’t necessarily mean interest rate hikes will accelerate or increase, as any central bank decision will be “data dependent”.
In any case, he assures that this program cannot be compared with the program launched ten years ago by the ECB after the famous ‘whatever it takes’ statement by which the then chairman of the body, Mario Draghi, managed to stop the euro crisis.
Source: La Verdad
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
