Interview with Die Presse

Interview with Luis de Guindos, Vice-President of the ECB, conducted by Jakob Zirm on 28 April 2025

3 May 2025

Die Presse: Since June 2024 the ECB has already cut interest rates seven times. How long will this period of interest rate cuts last?

Luis de Guindos: This will depend on how inflation develops. But we can be optimistic because our latest forecasts show that, from the end of this year, inflation will be very close to our target of 2%. Moreover, inflation continues to fall thanks to three additional factors. First, the euro has appreciated. Second, energy and commodity prices are declining. And third, the current economic uncertainty about tariffs could lead to greater wage moderation than that already suggested by the latest survey results. All these elements contribute to bringing inflation further down. And this is the decisive factor in whether we continue to lower interest rates.

Where would you place the neutral interest rate, i.e. the rate which neither stimulates nor restricts economic growth? Is this a target for the ECB?

The discussion about the neutral rate is very interesting from an academic standpoint. However, it is not very helpful for monetary policy decision-making because the neutral rate cannot be directly observed. Our decisions are based on how inflation develops, our projections and how our monetary policy is transmitted to the real economy. And, as I said, we are optimistic that we will sustainably achieve our inflation target.

The US Federal Reserve is lowering interest rates much more slowly than the ECB. Is the large interest rate differential between the United States and the euro area a problem?

The situation in the United States and Europe is different. You should look not only at nominal interest rates, but also at real interest rates. In the United States, inflation and inflation expectations are higher than in Europe, due to a different economic outlook. So the interest rate differential is smaller in real terms. In addition, inflation is more persistent in the United States.

We have policy space to pursue our own monetary policy, but of course we are monitoring what is happening in the United States.

In 2022 the euro depreciated massively after the Federal Reserve hiked interest rates half a year sooner. Is there a similar risk again now?

Not necessarily at the moment. Despite all the uncertainties and contrary to expectations, the euro appreciated after the tariff announcements. Exchange rate developments depend on many factors. We do not have any exchange rate objective, but we monitor the exchange rate closely because it is an important macroeconomic variable in our assessment of the risks for price stability.

It is important to moderate exchange rate volatility.

But if the trend reverses and the dollar becomes significantly stronger again, could this fuel inflation in the euro area again?

We are closely monitoring exchange rate developments. But there are currently no signs of a weakening of the euro. Much will depend on how the current dispute over tariffs develops.

The average inflation rate in the euro area is currently 2.2%. However, some eastern European countries still have inflation rates of 3% or 4%. Is inflation really under control everywhere in the euro area?

Differences in inflation developments between countries are normal, it’s the average that is crucial. Our projections show that both headline and core inflation are on track to reach our 2% target. We are paying particular attention to monitoring services inflation, which is strongly influenced by wages. Here, too, we are seeing signs of a slowdown in wage dynamics.

Let's talk about growth. In March the ECB predicted GDP growth of 0.9% for the euro area in 2025. Is this still realistic given the tariff debate?

You are right – this forecast was made before the announcement of US tariffs. Uncertainty we’ve seen since then has weighed on economic activity and is likely to delay investment and consumption. Uncertainty is always bad for the economy. We already pointed to such downside risks in our March projections. The risks are now materialising.

In Austria, we are in recession for the third year in a row now. Could the entire euro area slide into a recession?

No, our baseline continues to expect very low but positive growth. It’s well below potential growth, but I don’t think that the euro area is heading into a recession.

US tariffs are currently suspended. How bad would the damage be if the trade war were to escalate?

An all-out trade war would have a very serious impact on growth. I really hope it doesn’t come to that. It is also important to take the diversion effects that can occur in trade flows into account, making the consequences difficult to predict.

US President Donald Trump recently launched a mass attack on the Federal Reserve and its Chair Jerome Powell. What are the consequences of such an attempt to exert political pressure on the work of central banks?

The independence of central banks is crucial. It is key to their credibility and thus to combating inflation. Even when inflation was extremely high two years ago, inflation expectations in Europe remained anchored because the central bank was considered independent and credible. This credibility is essential to keep inflation expectations under control and, in particular, to avoid wage-price spirals.

There has been a discussion on whether the euro’s role as a reserve currency could be strengthened if confidence in the US dollar declines. Do you see that as possible?

The dollar is clearly leading as a reserve currency. The international importance of the euro is a lot less in comparison. Its future development depends on us, however. If Europe builds stronger capital markets and establishes itself as a true single market, the role of the euro at international level could be strengthened. Closer integration and a more pro-European approach are crucial.

What would be needed to create a true European capital markets union?

Three central pillars would be needed. First, we need a true single market – barriers and national legislation that impede further integration must be removed. Second, we need to complete the banking union. We already have single supervision and resolution, but we still lack a common deposit guarantee scheme. Third, we need to further develop the capital markets union itself. These three elements are interconnected – progress in one area is difficult without progress in the other two.

Many support the capital markets union but little progress has been made. Who is blocking it?

The problem is that without a true single market for goods and services, the capital markets union is also difficult to implement. The banking union is more advanced but there is still a lot to be done. Capital flows follow the real economy, which is why we need integrated goods and services markets.

In this situation, does it help if national governments block cross-border bank mergers – as is currently the case in Germany, where UniCredit wishes to buy Commerzbank?

I will not comment on any specific mergers. But in general, we support cross-border mergers because they are necessary to create truly European banks and complete the banking union.

Is there too much nationalism in the European financial system?

Sometimes there is too much national focus. But there is a growing awareness that Europe needs to become more independent. And the only way to remain relevant on the world stage is to be more European and a little less nationally focused.

The European Commission is now also pushing ahead with the simplification of European regulation. This also applies to the financial market of course. Where should economic activity be made easier for businesses?

The ECB has set up its own high-level task force, which I coordinate. It’s meant to draw up proposals by the end of the year, which will be passed on to the legislator. This may involve, for example, the implementation of Basel III or reporting, which could be streamlined, or the simplification of bank capital structure, to make it clearer and more understandable for investors. However, simplification does not mean de-regulation, it should not jeopardise banks’ solvency.

When inflation was high, many euro area countries steeply increased their debt and the ECB bought many government bonds, which amounted to some 30% of the outstanding volume in the case of some countries. Is that a problem?

Those measures were necessary in the context of the pandemic. But now we need to increase defence spending and preserve fiscal sustainability at the same time in order to avoid rising market interest rates and thus lower private investment. That won’t be easy.

The Austrian central bank has reported annual losses of more than €2 billion in the past two years. This was due to the purchase of low-yield government bonds. Is that the hidden price of expansionary monetary policy?

Our monetary policy is not determined by the profit and loss accounts of the central banks. Looking back, central banks have made significant gains over the past ten years. The current loss is a consequence of the high liquidity in the market, on which central banks have to pay higher interest rates. However, this liquidity is currently being reduced at a fast pace. The situation will improve in the future.

Are the high debt levels of euro area countries jeopardising future growth?

When markets have doubts about debt sustainability, market interest rates rise, which can reduce private investment. That is why a credible and sustainable fiscal policy is crucial.