Guindos warns of high inflation in 2023 and that the ECB will continue to raise rates

The vice president of the European Central Bank (ECB), Luis de Guindos, has advanced today in Madrid the next projections of the institution, in which "complex times of lower economic growth" are predicted, with high inflation in 2023, especially in the first semester of the year.

Thomas Osborne
Thomas Osborne
23 November 2022 Wednesday 03:40
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Guindos warns of high inflation in 2023 and that the ECB will continue to raise rates

The vice president of the European Central Bank (ECB), Luis de Guindos, has advanced today in Madrid the next projections of the institution, in which "complex times of lower economic growth" are predicted, with high inflation in 2023, especially in the first semester of the year. In response, he warned, the ECB will continue to raise interest rates.

"The possibility of a technical recession is there" and there has been "a deterioration in economic prospects" in which the slowdown "is not going to reduce the high level of inflation by itself," said the former Minister of Economy during the XXIX Meeting of the financial sector, organized by Deloitte and ABC. "Our job is price stability," which is "the biggest contribution a central bank can make to the economy," he added.

Guindos warned that interest rates will continue to rise. "Monetary policy will continue to normalize" and, although it is not possible to anticipate whether there will be a new rise in December, "we will continue to raise interest rates until we reach an inflation level that converges with our definition of price stability ", he claimed. The objective of the ECB is that inflation does not exceed 2%.

To achieve this goal, the journey is still long. "Projections indicate that inflation will continue around 10% in the coming months (in the euro area) and will begin to slow down after the first half of next year, but always in a high inflation environment, between 6% and 7%". "We believe that in the coming months it will continue to be high." The European Commission has set its inflation forecast in the euro zone for 2023 at 6.1%.

The ECB's response is what Guindos describes as the normalization process. "Intense and persistent" inflation has already given way to a "tightening of financial conditions." The ECB has raised interest rates and started a balance sheet reduction process, which means that the system will become less liquid in the coming months.

Now begins a "cautious and prudent" process in which the ECB has to go "game by game", he said. There is a great risk, which has to do with what happened in the United Kingdom, where the Bank of England had to intervene after former Prime Minister Liz Truss's plan for general tax cuts caused a rise in the risk premium.

"We have seen what happened in the United Kingdom, it is a good warning for other parts of the world, I hope that governments are aware of a prudent fiscal policy," he said. The ECB warns that lowering taxes can be counterproductive to deal with the main problem, which is inflation. "Now fiscal policy has to be much more selective and temporary and focused on vulnerable groups," she said.

"The experience of Reunido Unido is clear: a very expansive policy budget is approved that collides with a monetary normalization process, and that affects pension funds and the Bank of England has to intervene to avoid a problem for financial stability ", he explained. "It is important that monetary and fiscal policy do not collide," she added.

Guindos also warned of the problems of the current situation for many small businesses and the deterioration of the economic conditions of the most vulnerable households, which are the ones that suffer the most from inflation. As positive aspects, he highlighted the health of the banks, "with a much better situation than in the previous crisis", and the good performance of employment, which "is perfectly enduring a situation of economic slowdown".