European Central Bank Vice President Luis de Guindos warned that consumer-price growth may pick up again temporarily, though its prevailing direction is downwards.
Speaking to the Frankfurt Euro Finance Week on Monday, he said that the euro-zone economy will stay subdued for now though it should then strengthen again, while there are signs that the labor market is starting to weaken.
“We expect a temporary rebound in inflation in the coming months as the base effects from the sharp increase in energy and food prices in autumn 2022 drop out,” Guindos said. “But we see the general disinflationary process continuing over the medium term.”
Euro-area inflation is at its weakest in two years, though at 2.9% it’s still above the ECB’s 2% goal. Officials have warned of a difficult “last mile” back to price stability as government aid to cope with the cost-of-living crisis is withdrawn and workers’ salaries rise. Guindos acknowledged risks on the horizon.
“Energy prices remain a major source of uncertainty amid heightened geopolitical tensions and the impact of fiscal measures,” he said. “The same is true for food prices, which may also come under upward pressure owing to adverse weather events and the unfolding climate crisis more broadly.”
After a record tightening spree, the ECB is probably at its rate peak. Policymakers including President Christine Lagarde have said that borrowing costs will stay at the current level for some time, though markets are betting on a cut in April.
“We consider that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal” of taming inflation, Guindos said.
He pointed to new ECB forecasts due at the December decision that will put officials in a “better position to reassess the inflation outlook and required policy action.”
Before that, the European Commission will on Wednesday publish new projections for the region, which the Governing Council may look to for a view on the risks ahead.
