Luis de Guindos, the vice president of the European Central Bank, points to a persistent issue: bank profitability remains modest even as rates rise and economic activity slows. He warned that the higher cost of financing will press on both companies and households, potentially squeezing balance sheets across the euro area. In a public discussion organized by the San Juan Pablo II Institute and the Renta 4 Foundation, he emphasized that weaker profitability is not simply a temporary setback. It mirrors a broader challenge for financial institutions as their funding costs are likely to increase, a dynamic that could ripple through lending and investment across countries. The comment underscores a real concern for policymakers watching credit conditions tighten at a time when growth remains uneven across the bloc, as reported by financial observers and summarized by Reuters.
Guindos argued that the recent gains in bank profitability, which have supported a rally in bank shares in recent months, may create a misleading impression of durable strength. He described the improvement as having a mirage-like quality, suggesting that markets should remain cautious and not become complacent about the underlying profitability trajectory. Inflation trends still matter, and he warned that markets can be wrong at times. The message is clear: while markets may applaud temporary improvements, the fundamentals of banking profitability and macro stability require careful, data-driven assessment as monetary and fiscal conditions evolve. This cautionary stance was reiterated in discussions about how inflation dynamics, if they stubbornly resist easing, could complicate the path back to sustainable growth.
On the policy front, Guindos highlighted a potential risk from a mismatch between fiscal expansion and monetary tightening. An aggressive balance between spending and rate policy could shake markets and undermine confidence, sometimes producing turbulence similar to what occurred in the United Kingdom during recent episodes of policy misalignment. The reminder serves as a call for coordinated policy planning, ensuring that fiscal impulses are aligned with the monetary stance to avoid destabilizing market reactions or undermining the transmission of policy. The EU’s experience is closely watched in this regard as the bloc seeks to balance stimulus with price stability.
Turning to inflation, Guindos noted a notable deceleration in headline pressures driven by lower energy costs, especially natural gas allowing prices for energy to retreat. He credited the decline in energy prices as a contributing factor to the improvement in inflation rates, while stressing that core inflation remains stubborn. Core inflation, which excludes volatile energy and food components, has yet to show a decisive moderation, indicating that underlying price pressures could persist even as energy-driven gains fade. This distinction matters for setting the future pace of monetary policy and for forecasting economic performance in the euro area. The ECB’s approach continues to focus on anchoring expectations and ensuring that price stability is not compromised as supply chains ease and the labor market adapts to evolving conditions.
Despite these mixed signals, Guindos expressed confidence that the euro area has moved beyond the possibility of a technical recession. He observed that early indicators and the resilience of demand have helped the region avoid the dreaded downturn, a development that surprised some observers. Looking ahead, he suggested that the trajectory appears favorable for growth to resume this year, assuming that inflation continues to ease and energy markets remain stable. This outlook is conditioned on the persistence of improvements in productivity, supply chain efficiency, and the gradual normalization of labor markets, all of which contribute to a more sustainable expansion path. Market participants are closely watching how external developments, including global energy dynamics and geopolitical tensions, could influence the Eurozone’s growth prospects in the months ahead. Reuters contributions to the discussion highlight these points as part of a broader assessment of the euro area’s economic landscape.