(Bloomberg) -- The European Central Bank has made significant progress in bringing down inflation but can’t declare victory just yet, according to Vice President Luis de Guindos.
“The incoming information shows that the disinflationary process is now well on track,” he said on Monday in Madrid. “The outlook, however, is surrounded by substantial risks.”
Geopolitical conflicts threatening to push up energy and freight costs, extreme weather and sticky wage growth all have the potential to keep price pressures high for longer, Guindos said at a conference. At the same time, past rate hikes might damp demand — and inflation — more than expected, with weaker global growth an added downside risk.
The Spaniard was one of just a few officials who hadn’t commented on the future interest-rate path after the ECB in mid-October lowered borrowing costs for a third time this year.
Recent remarks by his colleagues show divergent views not only on the speed and extent of further moves, but also on how to communicate the ECB’s intentions, risks to the inflation outlook and quantitative tightening.
Speaking in a separate interview with Italian news agency Ansa published on Tuesday, Guindos highlighted that the medium-term trajectory is more important than the pace or size of interest rate cuts.
“It’s important to be cautious and prudent,” he said, according to a transcript of the interview published on the ECB’s website. “We have reduced interest rates and the trajectory of our monetary policy is very clear, but there is a huge amount of uncertainty and we cannot make mistakes. That’s why a gradual approach to implementing monetary policy is essential.”
Investors and markets are betting on a series of quick reductions to come amid a faster-than-expected retreat in inflation and an economy that is stagnating at best.
Guindos said the economy has been weaker than expected, with risks elevated and tilted to the downside.
“Lower confidence could prevent consumption and investment from recovering as fast as expected and geopolitical risks continue to pose a threat to the world economy by disrupting energy supplies and global trade,” he said.
He added that the ECB still expects growth momentum to pick up as consumption and investment rebound and exports rise.
Capital Economics on Monday revised its ECB call and expects it now to implement back-to-back 50 basis points cuts in December and January and lower the deposit rate — currently at 3.25% — to 1.5% by mid-2025.
They forecast 1.5% inflation on average in 2025 and 2026 — a significant undershooting of the ECB’s 2% target.
Guindos reiterated the ECB’s official policy guidance, saying decisions would be taken on the basis of incoming data and projections — from one meeting to the next.
(Updates with comments to Ansa in sixth paragraph)
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