Source: European Central Bank
Interview with Luis de Guindos, Vice-President of the ECB, conducted by Jon Ihle
16 March 2025
The progress of annual inflation, at least up until February, looked like it was going in the wrong direction. Are you still confident that it will converge towards 2% sometime this year?
The disinflation process is on track. There was a small pick-up inflation in recent months, but this had been expected, mostly on account of unfavourable base effects in November, December and January.
The main reason for our confidence that inflation will come down to 2% is that all indicators for services and underlying inflation are moving in the right direction. A very important one is compensation per employee. According to recent data and in line with our projections, wage growth is moderating, which will help services inflation to gradually decline.
At the same time, we need to keep in mind that factors like tariffs and fiscal policy are causing a lot of uncertainty. But taking this into account, we are confident that headline inflation will converge on a sustainable basis towards our 2% medium-term target towards the end of this year or the beginning of next.
Let’s talk about some of the factors in this uncertain environment. What are the specific factors that are influencing the Governing Council’s thinking about the rate path right now, and how has that changed since the start of the easing cycle?
We have already reduced interest rates by a total of 150 basis points. This is what we refer to in our monetary policy statement as a “meaningfully less restrictive” stance than at the beginning of the cycle.
Our projections now show that inflation will converge towards our target in the medium term. But again, we need to consider the uncertainty of the current environment, which is even higher than it was during the pandemic. For instance, our projections don’t include the definitive level of the tariffs imposed by the United States and its trade partners, since the current situation is so volatile.
Nevertheless, we are confident that inflation is moving towards our target on a sustainable basis, for example due to the moderation in wage growth I mentioned earlier. Even energy prices, which had also resulted in a small pick-up in inflation, have started to decline.
Markets in the last few weeks have had some very strong reactions to the external environment. I’m thinking of the increase in German bond yields, changing expectations for fewer rate cuts from the ECB and the stock market correction in the United States. Does any of that feed into the ECB’s thinking on the rate path?
We look at a wide range of indicators, all of which have an impact on our analysis. These include the evolution of wages and of the economy in terms of domestic demand and growth. And we of course look at financing conditions, for which our bank lending survey is very useful.
It’s true that bond yields have increased due to the new German Government’s budgetary plans and that we have seen a correction in US equities from very high levels. But we also need to try to look through the short-term evolution of markets and distinguish between short-term volatility and permanent or medium-term forces. If we were to be as volatile as the markets, that wouldn’t be very reassuring.
You said the uncertainty now is even greater than during the pandemic. How would you characterise it? What are the big unknowns at the moment?
First, the policies of the new US Administration. There’s a lot of talk about tariffs, but it’s not just about that. The new Administration has also been quite clear about deregulating banks, non-banks and crypto-assets. And beyond that, they have announced that they want to modify corporate tax, which could affect capital flows across the Atlantic. In general, what we’re seeing is that the new US Administration isn’t very open to continuing with multilateralism, which is about cooperation across jurisdictions and finding common solutions for common problems. This is a very important change, and a big source of uncertainty.
Second, and as a result of the new Administration’s attitude towards defence, we have the European Commission’s proposal to increase national defence spending by 1.5% of GDP. This is certainly a decision in the right direction, and it will have an impact on the macroeconomic outlook. We don’t know enough details about the package to make an accurate assessment about its impact on the economy, but it will likely be positive for growth and have a limited impact on inflation.
Let’s focus on defence. Are you comfortable with national budget rules being relaxed to accommodate more defence spending? Will you need to adjust your monetary policy as those changes in fiscal policy come through?
We always take fiscal policy into account because it interacts with monetary policy. In this case, we need to know the concrete details of the package before we can make an accurate assessment. How will spending be distributed across items? In terms of economic impact, spending more on military wages is not the same as spending more on weapons. How much will be spent outside of the EU? How is it going to be financed? One part will be common debt, but the package is much larger than that. The rest could be covered by taxes or a reduction in public spending. All of these factors are important to know in order to assess the impact of the package on the economy.
It looks like we may be moving closer towards a resolution of the war in Ukraine, or at least a ceasefire. Would that be beneficial for the euro area economy? Would it change anything of what you’ve outlined so far?
From a human standpoint, a peace agreement would obviously be very positive. And in general, it would be beneficial for the economy as well. But we would need to see the exact terms of a potential settlement to know for sure.
Turning to the United States, what role do you see for the ECB in terms of managing trade shocks and the overall approach of the Trump administration?
We need to keep in mind that the current situation is very volatile. It seems like every day a new tariff is imposed or one that has already been announced is removed. Hopefully we’ll soon have more clarity on the US Administration’s plans for the time ahead.
Obviously, a trade war would be a lose-lose situation for everybody. It would have a much worse impact on growth than on inflation. This is because increasing tariffs raises prices at first, but lower growth subsequently offsets this initial price increase. We also need to look not only at bilateral tariffs between the United States and Europe but also at what economists call “trade diversion”. This means that, for example, tariffs imposed by the United States on Chinese goods could redirect trade flows to Europe, along with whatever economic impact that may have.
Once we have all the details of the final policies, we will be able to better assess their impact based on all these factors. We are now using a baseline scenario and several alternative scenarios with different trade distortions to try to calibrate the impact as best as we can.
Another aspect of the uncertainty in the United States is the way Trump is changing the relationship of the White House to many of the independent agencies in Washington. One of those might be the Federal Reserve. What would it mean for the ECB if its independence were to erode under President Trump? Has that scenario been discussed at all in the Governing Council?
No, we haven’t discussed that because we can’t imagine it happening. The independence of the Federal Reserve is enshrined in law. We will always defend the independence of central banks, which is crucial to ensure they can fulfil their mandates.
There are a lot of question marks over the predictability of the United States. Does Europe need to start thinking about making the euro more of a global reserve currency, if the dollar becomes less reliable?
The euro is already a reserve currency, and strengthening its role in that respect is not part of our mandate. But keeping inflation low, increasing the potential growth of the European economy, signalling openness to trade agreements with different jurisdictions and making the European Union a model for free trade all over the world – all of this would strengthen the role of the euro as a reserve currency.
But do you see a need for Europe to step more into that role ahead of the United States?
I wouldn’t make comparisons with the United States. What Europe should do is maintain the position that it has always had as an open economy, in favour of free trade, the free flow of capital and multilateralism.
Earlier you said that a trade war would be very detrimental to growth, but we don’t know all the details yet. How has the ECB’s view on euro area growth evolved in the last few months?
We have downgraded our growth outlook for 2025 and 2026 by 0.2 percentage points. There are two main drivers behind that downward revision. First, uncertainty about the economy in the coming months has clearly dented confidence, and this is having an impact on investment. And second, a possible trade war would reduce net exports.
Philip Lane has said recently that the conditions in the euro area are right for a pick-up in household consumption. Do you share his optimism that it can increase and maybe drive economic growth?
All the factors that Philip indicated are correct. Real wages have increased, inflation is declining, interest rates are coming down and financing conditions are better. But still, the reality is that consumption is not picking up.
This is because consumers don’t always react to developments in their short-term real disposable income. They also consider what might happen with the economy over the medium term, which is clouded in uncertainty. The possibility of a trade war or wider geopolitical conflict has an impact on consumer confidence.
Eventually, the increase in the factors that Philip pointed out will prevail. But right now, the lack of consumer confidence due to the uncertainty of the world economy is offsetting that effect.
European households have enormous cash savings at the moment, especially since the pandemic. Christine Lagarde has spoken frequently about turning those cash savings into investment to drive innovation and growth. Are you optimistic that this can become a reality?
The capital markets union is certainly very important, but looking at the current economic situation in Europe, it’s crucial to put structural reforms in place to make it more productive and competitive. This is also what the Letta and Draghi reports argued.
Fully integrating the internal market will be key here. It’s very difficult to have a capital markets union if you don’t have an integrated economy for goods and services. There are certainly concrete actions we can take to complete the capital markets union, but we should also focus on removing the internal obstacles to a real single market in Europe.
There are three key elements here: fully integrating the Single Market, completing the banking union and completing the capital markets union. We must make progress on these three elements in parallel; it will be very difficult to make progress on one of them in isolation.
Which of those elements would you say the ECB has the most influence on? And what can it do?
Our mandate is price stability, but we also have an advisory role and produce expert opinions. Our economists and researchers carry out a lot of analytical work on Europe. The European Council and the Commission listen to what we have to say, and we are also accountable to the European Parliament. So we continuously use our voice to make the points that we believe are key to making the European economy more productive and competitive.
Are you happy with the levels of credit flow from European banks to households and businesses?
They are on the rise, following the rate cuts and the improvement in financing conditions. Demand for credit is not very strong, at least from a corporate standpoint, although it’s gradually increasing. This has to do with the lack of investor confidence. If you have doubts about the future and you’re waiting to see what will happen with trade, fiscal policy and geopolitical risk, you don’t invest, so you also don’t borrow. But in the case of households, we have started to see a significant increase in demand for mortgages.
Speaking of housing: in several countries of the euro area, housing is in crisis. There’s an undersupply, and financing isn’t available to everybody that wants to buy a house. Do you think at this stage, nearly 15 years after the financial crisis, that lending rules are still too tight? Have regulators overcorrected on capital rules for banks, harming consumers and households?
The current situation is very different to the one that we had 15 years ago. As a finance minister in Spain, I was dealing with the burst of a big housing and credit bubble, similar to what we saw in Ireland. Now, residential real estate prices are a big problem, but the drivers aren’t the same as the ones we had back then. From a financing standpoint, the situation is very different because the banks’ solvency is not in question.
That being said, current developments in house prices are having a very negative impact on young people, who have a lot of trouble accessing housing. In some countries, this may have to do with issues with the rental market and how it is regulated. Policies should be put in place to make housing, mainly in the rental market, much more affordable. At the European level, improving the performance of the rental market will be very important in the near future. We should foster common action to achieve this, because it’s a significant source of social upset.
But this is for national governments to do, not the ECB. We do need to analyse the situation, however, because not all countries are in the same position with respect to their rental markets. And there are lessons to be learned from the policies some countries have put in place.