The Vice-President of the European Central Bank (ECB), Luis de Guindos, presented, on Thursday 25 May, the ECB’s annual report for 2022 to the European Parliament’s Committee on Economic and Monetary Affairs (ECON). This report is marked by the consequences of Russia’s aggression against Ukraine, the return of high inflation rates and the exit of the ECB’s key rates from negative territory.
Inflation.
Luis de Guindos obviously mentioned inflation.
He indicated that he foresaw a fall in headline inflation, but that the trajectory of core inflation would be different. He pointed out that with the withdrawal of support measures implemented in a differentiated way by Member States, headline inflation will represent a less reliable indicator of inflation trends in the short term.
The Vice-President suggested referring instead to underlying inflation statistics and trends in service prices.
In his view, these service prices represent the “most worrying” aspect of inflation.
Mr de Guindos also estimated that, according to projections, profit margins, which contribute to inflation, would grow more slowly in the medium term due to the fall in demand. In his view, more attention needs to be paid to the economic environment and financing conditions, on which the economic reactions of entrepreneurs and workers are based.
TPI
Asked about the Transmission Protection Instrument (TPI) by José Manuel Garcia-Margallo (EPP, Spanish), the Vice-President said: “The TPI is here, we hope not to call on it”, adding that the situation on the markets was calm despite the recent banking crisis and that spreads were stable.
Interest on bank reserves
In response to questions from Paul Tang (S&D, Dutch) on the distributional effects of the interest rate hike and on the return on bank reserves, Mr de Guindos believed that fiscal policy was better suited to dealing with distributional effects.
The Vice-President said that the real problem was not so much the remuneration of reserves as the situation of excess liquidity. In his view, the reduction in liquidity will stimulate competition between banks and, in this respect, the repayment of the TRLTRO lll loans in June and the ECB’s policy will help to reduce this liquidity.
Mr de Guindos also indicated that the ECB Governing Council would analyse the issue of minimum reserve requirements.
Interest differential on loans and deposits
Mr de Guindos replied to Georgios Kyrtsos (Renew Europe, Greek) and Paul Tang that the increase in rates should be reflected not only on loans, but also on deposits. He felt that the banks were not reacting quickly, because the excess liquidity was not forcing them to compete. On the other hand, they were making up for the losses incurred during the period of negative interest rates.
However, he pointed out that some banks were already increasing the remuneration on deposits, in particular because of the movement of deposits to money market funds offering better remuneration and because liquidity was decreasing.
European fiscal capacity
Finally, the Vice-President reaffirmed his support for a centralised European fiscal capacity.
25 years of the ECB
This hearing took place the day after the ceremony marking the 25th anniversary of the ECB, established on 1 June 1998 in Frankfurt, in the presence of the President of the European Commission, Ursula von der Leyen, the President of the European Council, Charles Michel, and the President of the European Parliament, Roberta Metsola.
ECB President Christine Lagarde said that the euro was more than just a currency and that it was the strongest form of European integration. Ms Lagarde affirmed that with its commitment to price stability, the ECB would “always be a cornerstone of that effort”.
Christine Lagarde added that the euro had emerged stronger from successive crises (financial crisis, sovereign debt crisis, Covid-19) and that Europe could strengthen its resilience on two fronts. Firstly, by better integrating its capital markets, which will enable Europe to facilitate investment in the green and digital sectors. Secondly, by completing the Banking Union so that the banking sector contributes to mitigating the risks of future crises rather than amplifying them.
Link to the report: https://aeur.eu/f/72y (Original version in French by Émilie Vanderhulst)