“Solid” banking system
Luis de Guindos, vice president of the European Central Bank, argues that inflation will ease gradually, but the euro area should expect a sustained period of elevated rates. The euro zone’s overall interest rate, which climbed to 7% in April, is projected to decline over time yet remain high in the near term. Core inflation, which strips out energy and fresh food, continues to run elevated, with services prices particularly persistent. These themes dominated the European Parliament’s Economic Affairs Commission as it prepared its briefing this Thursday. The Community Steering Committee, speaking this Wednesday, emphasized the need to withdraw energy support measures to prevent medium‑term inflationary pressures from reappearing and forcing a stronger monetary policy response later on.
“Fiscal policy will shape future inflation expectations,” De Guindos noted. As the energy crisis eases, governments should unwind support measures quickly and in a coordinated way to avoid fuelling inflation that would warrant a tougher monetary stance down the road. He also urged euro area governments to steer fiscal policy toward making the economy more efficient and to work toward reducing historically high public debt.
Headline inflation cooled to 7% in April from a peak reached last October, according to the ECB’s second assessment, but core inflation remains stubborn. Contributing factors include rising input costs and stronger wage and profit dynamics. The risk is that long-term inflation expectations could drift above the 2% target if these pressures persist. At the same time, there are downside risks tied to potential instability in financial markets and weaker demand, for example if bank lending slows more than expected or the monetary transmission loosens.
This scenario helped justify the ECB’s decision to raise rates by 25 basis points at its May meeting and to pause reinvestments in its asset purchase program starting in July. De Guindos did not reveal specific plans for the next gathering but reaffirmed the aim to keep official rates at sufficiently restrictive levels to return inflation to the medium‑term target at 2%, with the policy rate remaining at those levels as long as necessary.
“Solid” banking system
The ECB still regards the banking system as robust, even as tighter financing conditions test companies, households, and governments across the euro area. While recent failures in the United States and Switzerland drew attention, De Guindos credited the region’s banks for strengthening their fundamentals and mitigating those shocks. He did express concern about volatile real estate prices, especially in the commercial sector, and urged banks to strengthen their liquidity positions and funding bases. If rates rise, the impact will show up in both loans and deposits, and banks must respond accordingly.
De Guindos highlighted the need to tighten regulations on non‑bank financial institutions to avoid blind spots in the financial system. He credited the resilience of the European banking sector to reforms and prudent policy measures implemented in recent years, but noted that evolving conditions require ongoing regulatory updates. Governments should push forward with deeper European integration and a stronger banking union to preserve stability. In the coming year, he suggested tangible progress on several important dossiers could be achieved, reinforcing a system where stability and growth go hand in hand.