Luis de Guindos: Interview with Expresso
Interview with Luis de Guindos, Vice-President of the ECB, conducted
by Gonçalo Almeida on 13 September20 September 2024
Two years
ago when the ECB started raising interest rates, you told Expresso
that you didn’t know how high they could go. Did you at any point
think they would reach the level they have?
Talking about the
past is always much easier than talking about the future. Two years
ago inflation was very high. We have to remember that it was in the
region of 10%. At its peak, we had to tighten our monetary policy
quite a lot. But now I think good news has started to emerge as
inflation, which is currently slightly above the 2% mark, falls. We
have already cut rates twice, by 25 basis points each time, and I
think that the main message we now want to convey is that inflation is
getting closer to our 2% target and we expect it to reach the target
at the end of 2025.
The markets are now predicting that there
will be a cut at each ECB meeting between now and the end of the year.
Is this a possibility?
We are fully committed to our mandate
and data-dependent, taking a meeting-by-meeting approach, and this
will depend on the evolution of the whole set of data that we will
receive. We will hold two monetary policy Governing Council meetings
in October and December. It’s true to say that in December, we will
have more information than in October. We will have more information
and a new round of projections. But, you know, we have left the door
totally open. We want to maintain our optionality, and that will
depend on the evolution of the data. It is quite clear – and I think
that this is relevant – that the September inflation data is expected
to look very positive due to base effects, but at the same time, in
the last quarter of the year inflation will go up because of base
effects. So these are factors that we need to take into consideration.
But, and I repeat: we are keeping all of our options open.
In
the new September macroeconomic projections, economic growth for the
euro area has been revised down. Do you think the ECB has been on a
restrictive path for too long?
I think we need to look at
inflation and how it evolves. As I mentioned earlier, this has been
quite positive and we are currently on our way to reaching our target
at the end of 2025. But I think the reasons behind the evolution of
growth in European economies have much more to do with other factors.
It’s true that we revised down our growth projection, but it was a
marginal reduction of only 0. 1 percentage points. However, we also
stated something quite important: we believe that the risks to growth
are tilted to the downside. Our growth projection hinges on two main
elements. The first is that consumption is going to recover, and the
second is that there will be an increase in net exports.
Will
consumption be a fundamental factor?
I think the main factor
will be the evolution of consumption. We believe that with the drop in
inflation, households’ real incomes will go up, which will lead to an
increase in their purchasing power. The labour market evolution is
positive, which means that consumption will begin to increase over
time. But there are other factors at play, such as consumer
confidence. Even though real incomes improve, consumers may feel that
other factors are undermining their confidence, such as political
risks or other things that we can’t control. Having said that, we
expect that the economic recovery will be based on consumption and the
recovery in the purchasing power of households.
But the ECB
also revised down its growth projection for private consumption for
the next three years. What impact will this have on firms,
particularly in the services sector? Is the Volkswagen case an example
of the challenges that lie ahead?
I think the Volkswagen case
is a very specific and particular case. It’s going to be very
important that we start to see a recovery in consumption. As I already
said, this will be the main driver of the economic recovery. I am
fully convinced that the disposable income of households in Europe
will increase on average. But there are other factors at play, because
consumption does not only respond to income in the short term. I think
consumers need to see what economists refer to as an improvement in
their permanent income, their long-term income. And that is very
closely related to sentiment and confidence. At the moment, there is
an extremely high level of uncertainty, and that’s what is dampening
consumer behaviour. But I believe the conditions are in place for an
improvement in consumption in the short term, although there are other
factors over which we have no control. It is mainly confidence that
will be a key determinant of consumer behaviour. This is the main risk
we have identified.
Even though the ECB started to raise
interest rates in July 2022, consumer loans have continued to rise in
the euro area, especially in Portugal, year on year. In spite of the
adverse lending conditions, people continue to take on debt to pay for
holidays or buy a car. Do you think this is dangerous?
It is
absolutely true that there has been an increase in consumer credit in
general. However, on the whole I feel that this increase has been
relatively moderate. If you look at the aggregate data, you can see
that the evolution in loans to households is relatively contained and
close to zero. This is one of the reasons why we have said that
monetary policy is working.
Let’s look now at services
inflation, which is driven by consumption. Services inflation accounts
for almost half of headline inflation. Why hasn’t the ECB been able to
control this component of inflation?
Services inflation is the
weak spot of inflation, both now and in the future. I think we have to
take several factors into consideration: first of all, the demand for
services can be much stronger than the demand for goods. Second, and
most relevant: services are very sensitive to the evolution of labour
costs. We have seen that wage dynamics have been quite elevated. There
is some moderation now, but wages, or compensation per employee, have
been growing at a rate of over 4%. Simultaneously, there is another
factor, productivity, which has been close to zero. Consequently, unit
labour costs have been rising. The services sector is particularly
sensitive to the evolution of unit labour costs and we believe that
inflation in the sector will start to fall because we are expecting a
moderation in wage agreements and in compensation per employee
alongside a simultaneous, significant improvement in productivity. I
think that the main risk factor is pressure on costs in the services
sector.
And Portugal is one of the euro area countries that
has seen the highest growth in real wages since the year before the
pandemic. . .
Recently wages have been catching up with
inflation over the past few months. At the beginning, the increase in
inflation was significantly higher than the increase in wages, but of
course workers reacted, and now a process of catch-up is under way,
which is normal and appropriate. In my view, wages have to catch up
prudently and gradually with inflation. At the same time, we need to
see an improvement in productivity. The process of absorbing the
increases in labour costs through firms’ profits cannot go on forever.
As I said earlier, our projections show that wage dynamics will start
to moderate. We believe that in 2025 there will be a clear moderation
in wage increases. But it will be crucial to see productivity recover,
and there is still a big question mark about this.
Do you
think that the worst of economic tightening is already over for
families or do you think it will be felt in the coming
months?
We have started to ease our restrictive monetary
policy. In countries like Portugal, where most bank loans are variable
rate loans, the fall in interest rates will quickly be felt in
repayments due. Over time, something similar will happen in Spain. In
other countries where there is a higher percentage of fixed rate
loans, the impact will take longer to feed through.
At the
last ECB Forum in Sintra, Christine Lagarde expressed concern about
the debt levels in euro area countries. The plan presented by Mario
Draghi in recent days was highly praised by the ECB President, but it
is predicated on the issuance of more debt. Isn’t that a
contradiction?
No. First, we believe that the plan is good and
the diagnosis is correct. The most important part of the plan is the
recommendations for structural reforms. The figure of €800 billion is
used as an illustration, so as to throw into yet starker relief the
gap in terms of investment between Europe and the United States. It is
a way to show the effort that will be required in terms of public and
private investment. There are recommendations for ten sectors and I
believe that this is the part that we need to analyse with closer
scrutiny because it very clearly sets out the future agenda for the
Union’s economic policy. This €800 billion reveals the wide gaps that
have to be eliminated by means of a reformist agenda. This is the
responsibility of governments rather than the ECB. And I am convinced
that if the policies proposed in the plan were implemented, this
figure could be lower.
Turning to the banking sector, interest
rates on deposits with commercial banks have been falling for eight
months in the euro area, and Portugal has the fifth-lowest interest
rates. When the ECB was putting up rates, do you think that the
commercial banks could have done more to encourage households to
save?
When the transmission of monetary policy is effective,
increases or cuts in interest rates should affect both borrowers and
savers. Lending rates and the remuneration of deposits are expected to
reflect our interest rates. At present, the cost of loans is starting
to decrease and banks’ margins should start to decline.
Do you
think that Portugal should tax banks’ windfall profits, as is the case
for other sectors?
The improvement in the profitability of
European banks was a temporary circumstance. We have already started
to see a stabilisation and we project that it will start to decline.
So banks and investors should not view this improvement as guaranteed
or permanent. It will not be long-lasting.
The market value of
the US company JP Morgan is greater than the combined value of the ten
largest European banks. Is consolidation in the European banking
sector essential for its survival?
I believe that consolidation
is an important element. However, the contrast between the valuations
of European and US banks is a sign of the potential problems that we
face. I think that one reason for this is the lack of full banking
union, as well as the national approaches that still exist in the
banking sector. Because of this, investors regard US banks as having
higher intrinsic value than European banks. In this context, cross-
border consolidation is important and we hope that it continues to
make progress in the near term.
Including in
Portugal?
The Portuguese banks are performing quite well.
Overall conditions are favourable. An analysis of the shareholding
structure reveals that some are owned by foreign investors and others
by foreign banks. There are always challenges ahead, but the banks are
sound and resilient.
Over the last decade the ECB kept policy
rates practically at 0% or negative levels. Is there any scenario in
which rates could return to that level at some point in the
future?
The future is a very long time [laughs]. But if we look
at the short and medium term, at the next two or three years, I don’t
believe so. That was an extraordinary situation. Zero or negative
policy rates were due to a very specific situation and I don’t think
we will see them again in the near future.
And do you think
that keeping rates at that level for so many years caused any market
distortion?
Whenever an economic policy decision is taken,
there are pros and cons. No decision is without both pros and cons.
Ultimately, the decision taken had more advantages than disadvantages.
Remember that inflation was not a concern and the main risk was
deflation at that time. Deflation was linked to structural issues such
as globalisation, population ageing, GDP developments and
competitiveness. The current situation is a little different. The
globalisation process is changing and, while we are not entering into
a process of total fragmentation, we will not go back to how things
were before. This is an important structural component that will have
a bearing on inflation and economic growth over the coming years.
But this policy makes all investments seem attractive compared
with bank deposits, creating strong pressure in the property market.
Was it in some way one of the triggers for the housing crisis that we
are experiencing today throughout Europe?
Currently we have a
different paradigm. First of all, we don’t have a housing bubble like
we did 15 years ago, although prices have risen. There are real
factors beyond monetary policy decisions that affect housing market
developments. This is a significant problem, especially for young
people. The issue of affordable housing is not just a problem for
Portugal but also for Spain and other countries. We should consider
policies that boost and foster the building of affordable housing and
create an efficient rental market. While we can recall the
consequences of the previous housing bubble, the current problem is
the shortage of affordable housing, and it is important to recognise
that monetary policy is not the main factor behind this.
And
do you regard the Portuguese Government’s current measure of
subsidising house purchases by young people to be a problem for the
market?
There is a real problem here: young people are not able
to buy or rent a home. This has broader implications, at both the
economic level and the social level, affecting how the economy is
generally perceived. To solve this problem it is essential to combine
two elements that governments should seek to implement. First, it is
crucial to promote the building of affordable housing, both to buy and
to rent, since all the markets are interconnected. And in the short
term if there are specific segments of the population who are unable
to buy or rent a home, a temporary subsidy could be a solution that
should be considered.
José Luis Escrivá’s move from the
Government straight to the Banco de España has been heavily
criticised. From your experience, since you also left the Spanish
Government to join the European Central Bank, can the walls of a
central bank be immune to political power?
First, I would like
to say that the appointment of the governors of national central banks
is the responsibility of governments and we don’t carry out any
assessment of national policies. The process for appointing members of
the ECB’s Executive Board is different. Members are appointed by the
European Council following a vote in the European Parliament. I
believe that having a broader perspective on the functioning of the
economy is sometimes a positive thing. In the case of Spain, the
situation was a little more complicated because traditionally there is
a consensus on the choice, but this time no consensus was reached.
Your term of office as Vice-President of the ECB ends in 2026.
Do you already know who will replace you? Could Mário Centeno have a
chance of taking your place, for example?
I don’t know
[laughs]. I will have very little say in my replacement, as it will be
decided by the European Council and the European Parliament. Mário is
a great economist, an excellent governor and a good friend, but I
don’t have any influence on the choice of my successor.