Frankfurt am Main – In a wide-ranging interview with Reuters , European Central Bank (ECB) Vice-President Luis de Guindos provided rare insight into the ECB’s thinking amid rising global uncertainty. With inflation cooling but trade tensions flaring, de Guindos outlined how the central bank is navigating an increasingly fragmented world economy and why it remains confident in its path toward price stability.
Pause on Rate Cuts Reflects Uncertainty, Not Complacency
President Christine Lagarde recently signaled that the ECB was “in a good place,” prompting speculation of a pause in rate cuts. De Guindos confirmed that interpretation, emphasizing that the decision reflects not complacency, but rather the sheer magnitude of uncertainty surrounding the outlook—particularly when it comes to trade policy.
“The final outcome in trade negotiations is by far the most relevant factor of uncertainty we considered in our projections,” he said. The ECB has published alternative scenarios for the first time since the pandemic, including a baseline scenario assuming no retaliation and a 10% tariff, versus a more severe adverse case involving higher tariffs and retaliation.
Markets, he noted, have correctly interpreted the ECB’s stance. “Even in this context of huge uncertainty, I think markets believe and discount that we are very close to our target of sustainable 2% inflation over the medium term.”
Tariffs: A Double-Edged Sword
De Guindos described tariffs as a complex force: initially inflationary, but potentially deflationary in the medium term due to their negative impact on demand and growth. He also warned of longer-term risks from trade wars.
“A fully fledged trade war could give rise to fragmentation in the global economy and distortions in supply chains,” he said. “That would be inflationary in the longer term.” While tariffs may lower inflation in the next two years, the ECB must remain vigilant about potential structural shifts beyond its current projection horizon.
Inflation Outlook: Converging to 2%, But No Guarantees
The ECB’s latest projections show inflation dipping below 2% before returning to target in 2027. When asked whether this was simply a reflection of mean reversion—a statistical tendency for inflation to return to trend—de Guindos acknowledged the challenge.
“For 2027, we expect inflation to come back up to 2% because we don’t expect further appreciation of the euro or a fall in energy prices,” he explained. “But the level of uncertainty is huge. We need to stay data-dependent and decide meeting by meeting.”
He downplayed concerns about undershooting the target, noting that wage dynamics were cooling and compensation per employee remained around 3%. “I don’t think inflation hovering around 1.4% in Q1 2026 is going to unanchor expectations,” he said.
Fiscal Policy: A Growing Wildcard
With Europe expected to ramp up defense spending, de Guindos weighed in on the fiscal implications. “We will need to have more support from the people of Europe,” he said. “Governments will have to explain clearly the necessity for higher spending on defense—it’s a question of independence and autonomy.”
He cautioned, however, that much of the planned spending may take time to materialize. “This kind of expenditure takes time to be implemented, so the impact on inflation and growth is not going to be material in the short term.”
When asked if the ECB could support such spending through targeted measures like QE or TLTROs, de Guindos was clear: “This is something that we have not discussed.”
Dollar Doubts and the Euro’s Rise
Recent geopolitical tensions and shifts in U.S. policy have sparked growing doubts about the dollar’s role as the dominant reserve currency. De Guindos acknowledged that some central banks are increasing gold reserves, but he dismissed talk of an imminent shift.
“The role of the US dollar as a reserve currency in the short term is not going to be challenged,” he said. “In the medium term, the key is what happens in Europe—if we can achieve a more integrated market, then the euro will gain ground.”
He also addressed the euro’s recent strength, currently trading at $1.15. “It’s not going to be a big obstacle,” he said. “Much more than a specific level, we look at the speed of developments. So far, the evolution has been quite controlled.”
Digital Euro: A Strategic Priority
The ECB remains committed to launching a digital euro, despite slow legislative progress in Brussels. “From our standpoint, it’s quite clear that a digital euro is extremely relevant and useful in the payment context in Europe,” de Guindos said. “I hope we’ll be able to convince the legislators.”
He framed the digital euro as a public good: “People always want to have public money. If they doubt whether they can transform their current account balance into banknotes, then a bank run can take place. The digital euro is going to play a similar role in a digital world.”
Looking Ahead: Strategy Review and Global Fragmentation
Reflecting on lessons learned during the inflation surge, de Guindos emphasized the importance of flexibility. “We’ve learned that we must react forcefully to inflation when it’s too high,” he said. “And we’re now paying more attention to financial stability considerations.”
The ECB’s upcoming strategy review, he added, will be evolutionary, not revolutionary. It will focus on how the global framework has changed in recent years, particularly in light of increased economic fragmentation.
“We didn’t have any discussions about trade in 2021,” he noted. “Now, trade is one of the biggest uncertainties we face.”
Conclusion: A Central Banker in a Multipolar World
As the ECB navigates a world marked by shifting alliances, new technologies, and renewed geopolitical tension, de Guindos made it clear that the institution is preparing for a future where flexibility and vigilance are paramount.
“Monetary policy cannot solve everything,” he concluded. “But it can—and will—continue to adapt to ensure price stability in a changing world.”
