Interview with ECB Vice President Luis de Guindos

Q: What did President Lagarde mean by saying the ECB is in a good place?
A: Current projections highlight significant uncertainty, particularly regarding trade policies. Market expectations indicate a belief that we’re close to achieving our medium-term target of 2% inflation.

Q: Are rate cuts still expected in your projections?
A: Market expectations for interest rates influence our projections. However, trade issues are more significant for our decision-making process than potential rate cuts.

Q: Are inflation risks leaning more towards the upside or downside?
A: Tariffs can initially push inflation up, but they can also depress demand, leading to overall reductions in growth and inflation. Long-term impacts of trade wars must be considered.

Q: Why do you project inflation dipping below 2% before returning?
A: Factors like euro appreciation and raw material prices play a crucial role. Uncertainty remains, but we expect inflation to converge back to our target in the long term.

Q: Do you see undershooting inflation as a risk?
A: While 1.4% inflation is low, I don’t think it poses a significant risk to wage dynamics or expectations in the medium term. Wage growth remains steady.

Q: With increased defence spending in Europe, what should be its funding approach?
A: Fiscal policies’ impact needs careful consideration due to limited fiscal space in Europe.

Q: Could the ECB support defence spending, possibly via targeted QE?
A: This has not been discussed; our focus is on monetary policy.

Q: Should the ECB prepare for potential US dollar liquidity issues?
A: We believe that our swap lines with the Federal Reserve ensure financial stability. Concerns about the dollar’s status as a reserve currency are premature.

Q: What about gold reserves? Should we increase them?
A: Gold serves as a diversification tool; however, the dollar’s role as a reserve currency remains strong in the short term.

Q: Will the new ECB strategy reflect the lessons learnt from high inflation?
A: Expect a reassessment rather than drastic changes. Our definition of price stability remains, alongside better consideration of financial stability.

Q: How can China play a role as a partner for the ECB?
A: Cooperation with the People’s Bank of China is important. An integrated approach to trade is essential.

Q: What about a digital euro?
A: We support the digital euro as essential for financial stability in a digital world. Legislative support is necessary, and we aim to persuade legislators of its importance.