Luis de Guindos, vice-president of the European Central Bank, has called for caution in the banking sector when it comes to ‘celebrating’ increases in interest rates, since these can be a double-edged sword. Although in a strong and dynamic economy, moderate and progressive rises in interest rates entail an increase in intermediation margins and bank profitability, in an environment such as the current one it is not so easy to draw this parallelism. The economy is facing a series of headwinds that can damage bank balance sheets and slow demand for credit. In addition, this rate hike cycle could be neither progressive nor moderate. Everything will depend on the evolution of inflation.
For this reason, Luis de Guindos, in a presentation at the summer courses at the Menndez Pelayo International University, asked banks to remain cautious and “Don’t be blinded by the illusion of rising interest rates.” The price of the sector’s prices have soared on the stock market in the face of strong expectations of rate hikes, but the sector must take into account that a rise in interest rates can also affect the demand for credit and, therefore, the volume total granting of loans.
In this way, although the intermediation margins (what the bank obtains for lending and borrowing) are widened, banks must take into account that the granting of credit should slow down, which could damage profit expectations, especially in an environment as uncertain as the current one.
The Spanish economist has ensured that taking into account all the variables “The delinquency is going to rise, the economy is going to slow down and inflation is going to remain high… therefore, when making these projections, with all the pros and cons, the banks must be prudent.” Guindos has asked banks to maintain buffers and provisions for what may come in the coming quarters.
In addition, the vice-president of the ECB has explained that the anti-fragmentation tool prepared by the European Central Bank will placate unjustified rises in risk premiums (when markets overreact) and has revealed that this tool will target specific markets and jurisdictions.
The ECB has on the table various scenarios ofe work, including a “severe” one where “we would meet in recession in Europe in 2023″ and GDP will grow “slightly” in 2022.
The hypothesis would include factors such as a gas embargo, according to desvel. He justified it as a tool to contemplate any situation, although ruled out that it is the “central” forecast of the organism. The ECB recently revised down the growth projections for the eurozone from 3.7% to 2.8% this year and placed it at 2.1% for 2023 compared to the previous 2.8%, including the expectation of that inflation today at 8% ends at 6.8%.
Guindos justified the reduction in the impact of the war, the bottlenecks and the increase in energy prices, in the commoditiesin raw materials and other products that are “affecting families and affecting consumption.”
He admitted that the central forecast “is subject todownside risks”, that have moved the agency to also count as a work hypothesis with the aggravated scenario, although he detailed that the projection on the table is more positive thanks also to factors such as the evolution of employment. “The unemployment rate is the lowest since the creation of the euro”, he congratulated himself, and attributed it to the increase in private investment and the increase in public employment.
As for inflation, currently around 8% and with the underlying “close to 4%”, and where “all components of the basket have contributed to inflation”I trust that it has reached the ceiling. “In the coming months we expect inflation to be similar and to begin to slow down after the summer” and that, “according to the analysis of projections, it would lead us to be below 6% at the end of the year,” he confided.
Guindos expressed concern that to the factors that currently put pressure on prices were added the dreaded “second round effects”indicating that the transfer is already observed in the rise in wages of “several countries” in the eurozone and could affect collective bargaining, “and having higher inflation for a longer time will affect demand.”
To curb prices, he recalled that the ECB plans to raise rates by 25 basis points at its July meeting and to do so again in September, although the magnitude of its rise will depend on the indicators existing at that time. “It can be higher than 25 points depending on the inflation perspectives, if they are maintained or deteriorate”, pointed