(Bloomberg) -- European Central Bank Vice President Luis de Guindos said the banking sector is “going through a period of very high uncertainty” that dictates a meeting-by meeting approach on interest rate policy with no pre-commitment to a specific action. 

“We are open-minded with respect to the future,” the Spanish banker said in an interview with Business Post posted on the ECB’s website on Sunday. 

“The question now is how the events in the US banking system and Credit Suisse will impact the euro-area economy,” he said. “Over the next weeks and months, we need to assess whether they will give rise to an additional tightening of financing conditions.” 

Guindos said the ECB’s main concern in terms of financial stability following the fall of Credit Suisse Group AG is the situation of the 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 — but non-banks are interconnected with the traditional banks we supervise, and that’s why we also look into this sector,” he said. 

The situation is quite different than the financial crisis in 2008 as banks have much better capital and liquidity positions, well above minimum requirements, he said. 

The ECB on March 16 stuck to its stated intention and raised interest rates by half a percentage point. It gave no guidance on its future steps, a departure from its usual practice at recent meetings, adding that the uncertainty related to the health of the banking sector “reinforces” its data-dependent approach. 

‘Timely’ Return

Guindos said he wants a “timely” return to the ECB’s goal of 2% inflation. 

“We know it cannot be tomorrow, but it has to be within our projection horizon, which is a period of two years,” he said, adding that “the trajectory of inflation is much more important than just touching the 2% target.” 

Read more: Euro-Zone Core Inflation Set for New Record in Test of ECB Nerve

Headline inflation in the euro-zone is set to decline quite rapidly over the next six to seven months as base effects kick in, he said, noting that falling energy prices, a reduction of supply-side bottlenecks and the lagged impact of rate hikes will all play a role. 

“I am positive about the decline of headline inflation, but we need to look very carefully at the evolution of core inflation,” Guindos said. “To reach our target, core inflation must also start to decelerate.”   

Data for March due on Friday is likely to show that underlying inflation — which strips out volatile elements such as food and energy prices — reached a new euro-era record this month, even as headline inflation is on pace for a sharp decline.  

“It is very difficult to converge toward the 2% target in a sustainable way without a clear decline in core inflation,” Guindos said. 

Speaking at a conference on Sunday, Executive Board member Isabel Schnabel highlighted that “headline inflation has started to decline, but core inflation proves sticky,” according to slides published on the ECB’s website.

(Updates with Schnabel comments in final paragraph)

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