The banking sector is going through a period of very high uncertainty, which dictates a meeting-by-night approach to interest rate policy with no commitment to a specific action, according to Bloomberg European Central Bank Vice President Luis de Guindos.
The Spanish banker stated in an interview with Business Post that they were open-minded with respect to the future, and that they are open-minded with respect to the future.
He said that the euro area economy will be affected by the events in the US banking system and Credit Suisse. Over the next weeks and months, we need to assess whether they will lead to a tighter financing conditions. Guindos said that the ECB's main concern in terms of financial stability after the fall of Credit Suisse Group AG is the situation of non-banks, which have been growing as share of the financial system in Europe, and have taken a lot of risks during the times of very low interest rates in terms of liquidity, duration, credit, and leverage.
We are not the supervisors of non-banks. Non-banks are linked to the traditional banks we supervise, and that is why we look into this sector, he said.
The situation is quite different from the financial crisis in 2008 as banks have much better capital and liquidity positions, well above minimum requirements, he said.
The ECB raised interest rates by half a percentage point on March 16 and stuck to its guidance. It gave no guidance on its future steps, a departure from its usual practice at recent meetings, adding that there is an uncertainty surrounding the health of the banking sector that reinforces its data-dependent approach.
Guindos wants a return to the ECB's goal of 2% inflation.
He said that the trajectory of inflation is more important than just reaching the 2% target, because it has to be within our projection horizon, which is a period of two years. Read more: Euro-Zone Core Inflation Set for New Record in Euro-Zone Core Inflation Set Test of ECB Nerve
He said that falling energy prices, reduction of supply-side bottlenecks, and the lagged impact of rate hikes will all play a role in the decline of headline inflation in the euro-zone over the next six to seven months.
Guindos said that we need to look very carefully at the evolution of core inflation because we are positive about the decline of headline inflation. Core inflation must start to decelerate in order to reach our target. Even though headline inflation is on pace for a downward spiral, the data for March due on Friday shows that underlying inflation, which strips out volatile elements such as food and energy prices, has reached a new euro-era record this month.
Guindos said that it is very difficult to reach the 2% target in a sustainable way without a decline in core inflation.
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