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Euro zone price pressures finally easing – ECB’s de Guindos

By July 10, 2023No Comments

The ECB has raised interest rates at every meeting over the past year and promised another hike this month

The ECB has raised interest rates at every meeting over the past year and promised another hike this month

Underlying inflation pressures, a key focus for the European Central Bank, are finally easing across the euro zone, but services price growth risks being sticky and keeping price growth high, ECB Vice President Luis de Guindos said today.

The ECB has raised interest rates at every meeting over the past year and promised another hike this month.

It has argued that it cannot stop tightening policy until it sees a marked turnaround in the outlook for underlying prices, which filter out volatile food and energy costs.

“While underlying price pressures remain strong, most indicators have started to show some signs of softening,” de Guindos said in London. “While still wide by historical standards, the range of measures of underlying inflation recently began to narrow.”

But de Guindos added that inflation remained far too high, so the ECB’s job was not yet done, a remark seen as confirming that there is no debate about the July rate increase.

“We can see that in the case of services, they are much more persistent,” de Guindos told a lecture at King’s College London. “The stickiness of services inflation is much higher.”

Services prices are especially sensitive to the evolution of wages and labour costs are growing quite quickly, so the ECB will need to watch carefully whether the predicted moderation in wage growth materialises as staff now expect.

Another issue is profit margins. Firms have increased prices beyond costs and the ECB now expects margins to shrink back and absorb some of the impact of higher wages.

But this margin contraction has yet to materialise and some policymakers question whether policy should bank on such an unpredictable variable.

While policy doves, mostly on the bloc’s southern periphery, increasingly advocate a pause in rate hikes, hawks, who are still in a comfortable majority, are not yet backing down, arguing that a lot more evidence is needed that underlying price pressures are easing.

De Guindos also said the ECB’s past hikes would continue to impact inflation for years to come as it takes time for policy to be transmitted to the real economy.

“Owing to the tightening, inflation in 2022 was only half a percentage point lower than it would have otherwise been, while the downward impact is expected to average two percentage points over the period 2023-25,” he added.

De Guindos also repeated the ECB’s long standing call that fiscal measures aimed at easing the burden of high energy costs must now be rolled back because excessive spending could work counter to the ECB’s goals.

Article Source: Euro zone price pressures finally easing – ECB’s de Guindos – RTE

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