Interview with Oberösterreichische Nachrichten

Interview with Luis de Guindos, Vice-President of the ECB, conducted by Dietmar Mascher and Alexander Zens

23 May 2024

The next meeting of the ECB’s Governing Council is on 6 June. A reduction in interest rates is expected, as announced by some Governing Council members. So is the cut in rates a certainty? By 0.25 or 0.50 percentage points?

We have been very transparent about the decision at the June meeting. And we are taking a prudent approach, which would argue in favour of a reduction of 25 basis points.

How many rate cuts can we expect by the end of 2024, where will interest rates be next year?

There is a huge degree of uncertainty. We have made no decisions on the number of interest rate cuts or on their size. We will see how economic data evolve.

Is it possible that interest rates will be increased again in the coming months?

That is not our base scenario. It depends on how inflation develops. We believe that it will fluctuate in the short term and will sustainably converge to our definition of price stability, i.e., 2%, in 2025. But there are some risks: how wages are evolving, what is happening with productivity, unit labour costs and declining profit margins, to name the main factors. Added to that are geopolitical risks and uncertainties – Russia’s war in Ukraine, the conflict in the Middle East, possible tensions in Southeast Asia. We must remain very cautious. Nothing is predetermined with regard to cuts or changes in interest rates.

Inflation was unusually high recently. There was criticism that the ECB was too slow to react and that the situation then improved. What lessons does the ECB draw?

Our monetary policy has worked. Consider that as recently as in October 2022 we had inflation of more than 10%. It now stands at 2.4%. Core inflation has declined too. We need to attain price stability, that is inflation at 2%. But again: there are massive uncertainties, for political reasons and in respect of wages, productivity, etc. We need a prudent monetary policy.

Inflation varies widely across the euro area and is relatively high in Austria. There are 20 countries with different economic and fiscal policies. Does this need to be changed?

We always look at the euro area as a whole. Inflation differentials in the euro area were wider a year ago and have since narrowed. For instance, inflation in the Baltic countries was very high because they were particularly affected by the Russian invasion of Ukraine. And some euro area governments have been quicker than others in scaling back the support measures they had introduced in response to the energy price shock.

When will we actually see inflation reach 2% – in the euro area and in Austria?

According to our projections, we will reach a stable level of 2% in mid-2025. I assume that it won’t be much different in Austria.

It’s been 15 years since the turbulent financial crisis: how stable are banks in the euro area today?

They are resilient. We had a very good test: when the problems with regional banks in the United States and Credit Suisse occurred in March 2023, their impact on the European financial system was limited. This is because European banks have been a source of resilience – with high capital ratios and ample liquidity. But the past has shown that we must not be complacent. The increase in profitability will not last for ever, due to weak economic activity, rising non-performing loans and higher financing costs. There are potential headwinds in the future.

Last week you published the Financial Stability Review, according to which the conditions have improved but the outlook remains fragile.

The euro area has avoided a recession and inflation has eased. But there are three key risks. First, very high valuations and low risk perception may lead to large corrections in financial markets. Second, the commercial real estate sector, amid the property market downturn, is challenging real estate firms and some financial institutions. European banks are not significantly exposed to this sector and the problem mostly affects office space in non-prime locations. Nevertheless, some banks have specialised in this segment and we’re watching them closely. This could become a source of instability. Third, the non-banking sector is a potential vulnerability given its liquidity fragilities, such as in the case of open-ended investment funds. Some funds are also considerably exposed and enduring corrections in the real estate market and are interconnected with banks.

Signa’s insolvency is a big issue. How could such a large, complex and opaque group cause so much damage?

I can’t discuss individual cases. But, in general, it could be a sign that risk in the commercial real estate sector is materialising. We have long expressed our concerns about this market, due to stricter monetary policy, leading to higher debt service costs and the trend towards remote working.

The ECB wants banks to exit the Russian market quicker. Is it not difficult, given that it’s the Kremlin that has the final say?

Our recommendation was clear – reduce exposure. Our calculations show that euro area banks’ Russian business has shrunk by more than 50% compared with the time before the invasion. Some banks are finding it easier, others more difficult.

The ECB is also pushing Raiffeisen Bank International (RBI) to leave Russia. In addition, RBI is under pressure from US authorities. What would your advice to RBI be?

I can’t comment on individual cases. The recommendation is clear for all banks in Austria and Europe – reduce business in Russia as much and as quickly as possible.

The EU wants to use frozen Russian assets. What is your opinion on that?

Ukraine needs all the support it can get. At the same time, it is important to respect all legal requirements in Europe and avoid any damage to the euro as a reserve currency. But we understand that this is a complex political decision, and there are other factors that play a crucial role.

Many people are worried that higher interest rates may again spell trouble for highly indebted countries. You were the Economy Minister of Spain during the debt crisis. Why are the markets relatively calm this time around?

The situation is different. Countries that were in trouble between 2010 and 2012 – such as Greece, Portugal, Italy, Spain – now have a banking sector that is better positioned; they improved their competitiveness, reduced budget deficits with some of the countries already recording a primary surplus. Italy and Greece, for example, have high debt ratios but their economies are growing more than the European average. Sovereign bond yields have even fallen recently. This is a very good sign, as the ECB’s intervention in the market is substantially declining and will end at the end of the year.

Still, government budgets should be in even better shape, for example in Austria, shouldn’t they?

Government debt levels in Germany and Austria are much lower than most countries. And they are making efforts to reduce their deficits. But yes, they will also need to continue endeavouring to safeguard fiscal sustainability.

The ECB is advocating the creation of a capital markets union, which has been met with some resistance. How is it supposed to work?

The national capital markets should be integrated, including a single oversight body, insolvency framework and tax regime for dividends and interest. When you have 20 different rulebooks, it’s difficult for investors to make decisions. And it is important to make Europe more attractive for investment. At the moment, there are more business opportunities being created in the United States and China.

Can the euro compete with the US dollar as the world’s reserve currency of choice?

The euro is the second-largest reserve currency in the world. Its share is stable even though Europe’s economic weight has declined. This shows that the euro is a currency we can rely on.