European Central Bank Vice President Luis de Guindos showed some optimism that underlying inflation may be peaking as he insisted there’s no settled view on the path of interest rates after a likely hike this month.
(Bloomberg) — European Central Bank Vice President Luis de Guindos showed some optimism that underlying inflation may be peaking as he insisted there’s no settled view on the path of interest rates after a likely hike this month.
“We will be data dependent,” he said in London on Friday, after observing that “while underlying price pressures remain strong, most indicators have started to show some signs of softening.”
Officials including Guindos — one of the more hawkish members of the Governing Council — have made the outlook for inflation measures that strip out volatile items like energy and food central to their view on how tight monetary policy should be.
While an easing in core-price gains could open the door to a potential pause in rate-hiking, his remarks didn’t specify if that’s imminent.
“We have indicated that we are going to hike again in July — 25 basis points,” he said. “What happens in September is an open question.”
Yannis Stournaras, the Bank of Greece governor and one of the more dovish ECB policymakers, echoed that view on Friday. The July hike is “more or less given” but he’s “agnostic” about the following meeting.
“I’d be surprised if we have more hikes beyond September,” he added, noting that inflation data “don’t give a pessimistic picture.”
Even so, underlying price growth, driven by services, has appeared undefeated in the euro area, as with many advanced economies. It quickened in June to 5.4%, driven higher by Germany. Headline inflation remains slightly faster, at 5.5%.
Guindos said there’s a sense that gauges of core prices are beginning to converge, offering hope on the likely direction.
“The range of measures of underlying inflation recently began to narrow,” he said. “This suggests that the unusually high level of uncertainty around the downward trajectory of inflation over the medium term has started to ease somewhat.”
Recent consumer surveys will have provided policymakers with some encouragement that a mindset of faster consumer-price growth hasn’t become entrenched.
The ECB’s own gauge of household inflation expectations continued to decline in May after a steep drop the previous month. A separate survey by the European Commission showed the lowest reading since 2016.
Meanwhile the impact of prior tightening is starting to be felt, Guindos said, observing that “we are now beginning to see the impact on parts of the real economy.”
Policymakers are being careful to signal heightened vigilance however. Guindos himself insisted that “services inflation, and labour costs in particular, need to be closely monitored.”
Earlier on Friday, remarks by ECB President Christine Lagarde in a French newspaper reiterated that she and her colleagues still have “work to do” and are watching closely the behavior of companies.
Officials want to know if businesses will accept a profit squeeze to compensate workers, “or whether we are going to see a twofold increase – in margins and in wages,” she said. “A simultaneous increase in both would fuel inflation risks, and we would not stand idly by in the face of such risks.”
Guindos was still keen to emphasize that officials don’t have a pre-set view on what to do about monetary policy.
“I don’t know what’s going to happen with the future evolution of interest rates,” he said. “I can assure you, nobody knows.”
–With assistance from Sotiris Nikas, Paul Tugwell and James Regan.
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