De Guindos told CNBC that the ECB will do “whatever is necessary” to curb inflation.
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It is critical for the European Central Bank to signal its commitment to lower prices to keep inflationary expectations anchored, its vice president said.
Luis de Guindos told CNBC correspondent Annette Weisbach on Wednesday that the main risk of the wage-price spiral is that confidence in the central bank is not strong enough.
“That is why we are making such a commitment to price stability … and that we will do whatever is necessary to bring inflation down to what we consider to be price stability, which is 2%,” he said.
The salary was growth in the eurozonebut have not yet done so at a rate that would be “excessive,” de Guindos said.
But, he added, the lesson of the 1970s stagflation is that monetary policy should aim to avoid side effects.
Eurozone inflation is at 10.7%, the highest in the bloc’s history, and the ECB has raised its base rate to 1.5%, a level not seen since 2009, before the sovereign debt crisis.
De Guindos said he could not specify what the ECB’s final rate would be, although the markets “required guidance” but the central bank had to “be very clear that we are going to do our job, that we will bring inflation down and that we will raise rates to level consistent with the approximation of inflation to our definition of price stability.
The ECB published on Wednesday Financial Stability Review which outlines the challenges facing businesses and households due to the poor economic outlook, high inflation and tighter monetary policy.
It argues that governments need to provide targeted support to vulnerable sectors without hindering the normalization of monetary policy.
Economists predict that the eurozone is headed for a deep recession amid falling consumer confidence.
De Guindos said banks need to be “cautious and prudent” to avoid being blinded by short-term gains in profitability from higher interest rates and to brace for potential increases in insolvency and reduced household solvency.
Tight labor market unemployment at a record lowwas a “positive factor” but not guaranteed to continue into the future, he continued.
However, he downplayed the risks of such a fragmentation in the euro area, which could lead to a new debt crisis, noting that spreads between sovereign bonds are not widening significantly and that the ECB has new anti-fragmentation tools ready to be rolled out.
He also said the eurozone countries hadn’t seen “the kind of accidents we’ve seen in the mini-budget UK” and he hopes they won’t.
A series of unwarranted tax cuts and growth-support measures announced by short-time British Prime Minister Liz Truss, which occurred at a time when the Bank of England was raising interest rates and was about to start selling bonds, caused chaos in the securities market and nearly caused pension funds to go bankrupt.
Regarding quantitative tightening, de Guindos told CNBC: “My personal opinion is that we have to be careful. It has to happen, it has to be part of the monetary policy normalization process, but at the same time, given the level of unknowns in relation to the potential impact of QT, I think we should do it very carefully.
“It should be kind of passive QT and trying to reinvest only the redemption percentage of the bonds we have in our portfolio over different time horizons.”