European Central Bank Vice President Luis de Guindos said investors may not be fully pricing the risk of a stronger hit to the euro-zone economy following a year of interest-rate hikes and rising political tensions.
Further trouble in the Middle East is just one example of how geopolitics could yet upend hopes for a so-called soft landing where inflation is tamed without a major recession, Guindos said Wednesday.
Historical evidence suggests such a scenario is “difficult — although not impossible — to achieve in practice,” the ECB said earlier in the day in its bi-annual Financial Stability Review.
“The outlook that markets are taking with respect to the evolution of the economy, I would say it is a little bit sanguine and optimistic,” Guindos told Bloomberg Television. “There is a little bit of wishful thinking.”
The 20-nation euro area is teetering on the edge of a mild downturn, with output having shrunk by 0.1% in the third quarter. It looks like borrowing costs have peaked, though, with the ECB holding fire last month after an unprecedented run of 10 straight hikes.
The European Commission said last week that the euro area will probably avoid a recession as improving purchasing power among consumers drives a modest rebound. The ECB’s most-recent quarterly forecasts also support that outlook, though new projections are due at December’s policy meeting.
Despite economic fragility, officials maintain that it’s too early to discuss rate reductions, with inflation only expected to return to the 2% target in the second half of 2025. Investors see cuts starting as soon as April.
“I’m not going to discuss market bets, but I what can tell you is that our strategy is very clear in terms of communication: Data dependency and meeting by meeting and we’ll see how things evolve,” Guindos said. “I think that talk about rate cuts is a little bit premature.”
He reiterated that the downward path of inflation may be bumpy due to base effects, but that he’s confident the ECB’s goal will be reached.
--With assistance from Sonja Wind.