- 3 weeks ago
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00:00Let's start with some topics from the Financial Stability Review that was published today.
00:04It also contains a warning about high valuations in the AI sector and the potential sharp adjustment of prices.
00:11How bad could such a market correction be if the AI boom busts?
00:15You know, former Deputy Governor, Director of the IMF, Gita Gopinant, has warned that it could cause up to $35 trillion in global losses.
00:25Does that sound reasonable to you?
00:27Well, you know, as you have said, one of the main risks that we have identified in our FSR, in our report, is high valuations.
00:36High valuations because it's accompanied by low volatility and concentration.
00:42And I think that markets are discounting a very benign scenario that perhaps will not materialize.
00:49And if it doesn't, then there is a real risk of a correction.
00:53So, you know, that could have, you know, impact mainly on non-banks.
01:00But another message of the FSR is that the non-banks are very, you know, closely interlinked and intertwined with banks in Europe.
01:11So, you know, it could have, you know, spillover effects over the banks.
01:15So everything, at the end of the day, we have to bear in mind that everything is interconnected.
01:20And that, you know, there are no space in the financial market that is isolated from, you know, a potential accident in other parts of the financial system.
01:30Do you think that these non-banks and these private credit firms already pose a systemic risk that merits closer supervision?
01:37Well, they are growing quite a lot, you know, and, you know, the relevance, especially in the case of the U.S., but as well in Europe lately, you know, is growing significantly.
01:46And I think that, you know, perhaps the issue is that, you know, we have started to see that the exit strategy in order to dispose the assets that they have in their portfolios, you know, is not taking place as it used to be.
02:02So perhaps, you know, there are some issues with valuations there.
02:05And perhaps it would be important, you know, to have a closer scrutiny and, you know, a closer oversight of, you know, the valuations of these private credit and private equity institutions.
02:18This is something that we have to analyze.
02:20They are also, you know, connected with the banks.
02:23So, as I have said before, you know, these interlinkages are important to take into consideration.
02:29The situation of the banks in Europe is good, but we cannot oversee what's happening in other parts that, you know, are becoming more relevant in the financial system overall.
02:40The report also reflects some worries about weak public finances in some countries and the risk of a sudden repricing of sovereigns.
02:48How worried are you given such concerns about the situation in France where the government is still struggling to tackle the deficit?
02:54And how important is it from your point of view that France get its act together as soon as possible?
03:00Well, I do not want to single out any concrete country.
03:03You know, I can refer to, you know, the situation in the Union.
03:06The situation in the Union, there are disparities.
03:08This is something that is quite clear.
03:10But it's not only France the country that is having difficulties to approve the budget.
03:14There are other countries with, you know, in such a situation.
03:18Now, here the risk is that the fiscal space is limited in Europe.
03:22And simultaneously, countries have to increase defense spending.
03:27And simultaneously, you know, there are other needs, you know, digital, the green transition.
03:35So, you know, the situation is challenging for the European governments.
03:40And it's very important to maintain, you know, the perception in markets that fiscal sustainability is going to be guaranteed.
03:49That, you know, all the countries are going to respect, you know, the new governance, the new framework that, you know, we adopted a couple of years ago.
03:58So, this is, you know, this is the point.
04:01This is the challenge.
04:01But so far, you know, if you look at, you know, markets, sovereign debt markets, they are very quiet.
04:07Even in the case of France, you know, the spreads, you know, have not evolved abruptly at all.
04:15They are under, you know, the usual range.
04:19And, you know, in other countries, even you have seen, you know, that spreads are narrowing.
04:25And this has been accompanied by improvements in terms of ratings.
04:28So, I think, all in all, the situation today is good.
04:32But I think that we have to make very clear that, you know, there are fiscal challenges.
04:36And that is very important to continue delivering the perception that fiscal sustainability is going to be granted and is going to be delivered by the governments.
04:44You're not only vice president of the ECB, but also chairing its high-level task force on simplification on banking regulation.
04:51The German chancellor, Friedrich Merz, recently said that banking regulation in Europe is too rigorous.
04:56Do you agree?
04:56Well, I think that, you know, there is a point.
05:00And that's the reason behind, you know, the incorporation of this high-level tax force.
05:04What I can tell you is that the high-level tax force is about, you know, finalizing his, you know, report with the recommendations.
05:12Recommendations that will be made, you know, for the European Commission because they are legislators.
05:17I hope that, you know, the governing council of the ECB, that, you know, is at the end of the day, you know, is going to have the upper hand in order to approve, you know, the report.
05:29We'll do it before year-end.
05:31And before year-end, we'll be able to make public, you know, our report with recommendations for the European Commission.
05:37So, hopefully, over the next weeks, before year-end, we'll be able to have the report with recommendations.
05:45But do you think it will be enough to simplify regulation if there is a possible big wave of deregulation in the U.S.?
05:53Well, we are looking at what's happening, you know, in the U.S., you know, because we do not want to put the European banks in a position of competitive disadvantage.
06:02That's something that is quite clear.
06:05But, you know, we have some red lines.
06:07I think that, you know, the level of capital, the level of resilience of the European banks is something that is very relevant.
06:13In Europe, we didn't have any sort of accident in the banking industry lately.
06:18We had the situation of the regional banks in the U.S., Credit Suisse in Switzerland, and the European banks, the situation has been, you know, much better and much more, much more, you know, calm.
06:29And I think that this is a good sign about, you know, the supervision and the level of capital, the resilience of the European banks.
06:37And this is a factor that, you know, is going to be key in order to improve potential growth in the euro area in the future.
06:44Speaking of growth in the euro area, what do you make of the most recent data on growth and inflation?
06:51Has it become more likely or less likely that the ECB leaves a good place on rates?
06:56Well, I think that, you know, on growth, if you look at, for instance, the projections of the European Commission, we will have our projections in three weeks as well.
07:04But, you know, if we regard, you know, the projections of the European Commission, I think that, first, on growth, we are marginally slightly more positive than we were six months ago.
07:14That's the first conclusion.
07:17So, growth is going to be slightly above 1%, 1.2%, 1.3%, according to the European Commission.
07:26And, you know, this is good news.
07:29You know, it's not great, but we have to bear in mind that potential growth in the case of Europe is between 1% and 1.5%.
07:35So, it's going in the range of, you know, potential growth in the euro area.
07:42On inflation, inflation, the evolution is positive, you know, for both headline and core inflation.
07:47Services inflation is, that it was, you know, one of the main preoccupations that we had in the near past, is also evolving positively.
07:58And, you know, wage dynamics are also evolving positively.
08:01So, all in all, we believe that it's not only, you know, the evolution that we are seeing now, is, you know, our projections will indicate that, you know, we are going to be able to converge to, you know, our price stability target, that is 2%.
08:17So, in that respect, we have good news.
08:19Nevertheless, the level of uncertainty is huge.
08:22Well, I think that, you know, in the case of prices, we have to keep an eye on that.
08:27And, as well, you know, in the case of energy, energy, the evolution recently has been positive as well.
08:32So, all in all, I think that we can be comfortable with the evolution of inflation over the next months.
08:40Yeah.
08:40With growth almost at potential and inflation close to target, would it be fair to say that,
08:46for the December meeting, an on hold of rates is the most likely scenario, from today's point of view?
08:53I would say that the present level of interest rates is the correct one, according to, you know, the evolution of inflation,
08:59our projections, and the transmission of monetary policy.
09:03So, but again, you know, we are open.
09:05If there are any change in the circumstances in these elements, for sure that we can adapt, you know, our monetary policy stance.
09:12But so far, given, you know, these three elements, I would say that the present level of interest rates is the correct one.
09:19Yeah.
09:19And how do you assess the risks surrounding the outlook for growth and inflation?
09:23Are they balanced, or are they still to the downside, or even to the upside?
09:27Well, with respect to growth, you know, the risks are balanced.
09:31You know, that's something that we changed, because remember that, you know, in our previous forecast,
09:37we said that it was a little bit tilted to the downside.
09:41And with respect to inflation, you know, as I have said before, we do not, you know, make public our risk balance assessment on inflation.
09:50But, you know, I repeat again, I think that we are in a good position, and I am, you know, I am optimistic that, you know,
09:57we are going to be able to, you know, to accomplish our target in terms of price stability.
10:04Yeah.
10:05It seems likely that there will be a delay to the ETS2 system in Europe that could push the inflation projection at least for 27 down.
10:14How worried are you that two years of below-target inflation, let's say 1.7, 1.8, could lead to a de-anchoring of inflation expectations?
10:25Well, first of all, let's see, you know, let's see what happens, let's see our predictions.
10:30I think that the question of ETS is something that is a one-off, you know, that perhaps, you know,
10:35I don't know how it's going to be settled finally, but, you know, it's something that, you know, it will fade away, you know,
10:43after, you know, once, you know, the measure has been taken.
10:47And I think that we have to look much more, you know, to the underlying trends of inflation.
10:52And in that respect, I think that the risk of undershooting is limited, in my view.
10:59And, you know, we cannot ignore the level of uncertainty.
11:03So what's going to happen in a couple of years is something that, you know, we'll have to look at it, you know,
11:10very carefully at, you know, the data comes and the events come.
11:14But I think that now, you know, the risk of overshooting is something that is not quite relevant.
11:19And I do not see any sort of de-anchoring of inflation expectations.
11:23If you look at the inflation expectations, they are hovering around our 2% price stability target.
11:31Would you say that the next step is still more likely to be a cut or is the bias on rates neutral?
11:37Well, you know, given the uncertainty that we have now, I think that it will be extremely risky to say what's going to, you know, the next move.
11:44You know, what I can tell you is that so far, at present, the present level of, you know, the level that we have now,
11:49the 2% of DFR is the correct one.
11:53It's, you know, it's the level that, you know, really, you know, fits with, you know, our, you know,
12:01analysis of the situation and the potential evolution of inflation.
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