Inflation is a headache for the government and threatens to thwart its economic plans. This is a very difficult post for the executive branch to manage as it eats up revenue from households and businesses at a galloping rate. Despite measures to cushion rising inflation, Vice President for Economic Affairs Nadia Calviño acknowledged on Monday what seemed obvious weeks ago: “It is clear that we must work longer with a new scenario of higher inflation internationally”.
In this way, the vice-president opens up a sensitive issue for the government of Pedro Sánchez, since it is a setback that shakes the entire planned agenda. In fact, it even threatens to drastically reduce the impact that the use of European recovery funds will have on the Spanish economy. “The strength of the economic recovery, bottlenecks in global supply chains and Russia’s war against Ukraine are having a major impact on international commodity supplies and driving up prices around the world,” Calviño said at the opening of the Association’s Seminar of Economic Information Journalists (APIE ) at the Menéndez Pelayo International University (UIMP) in Santander with the patronage of the BBVA.
The Spanish economy has achieved this strength, as shown by the indicators reported by the vice president. However, the Russian oil and gas cutoff is putting strong pressure on prices. To mitigate this effect, the executive branch has taken measures that the government has calculated have deducted between two and three points from inflation. “We have the gas cap mechanism on the Iberian wholesale market and the discount on fuel prices that allow us to cushion the impact of rising prices,” Calviño pointed out.
The Consumer Price Index (CPI) in Spain ended May at 8.7% and the Bank of Spain forecasts it to end the year up 7.2%. For the European Central Bank (ECB), it is also the main risk that it wants to counter, hence the measures to normalize economic policy decided in recent weeks. Eurobank forecasts suggest that average eurozone inflation will be 6.8% this year, falling to 3.5% in 2023 and 2.1% in 2024. In other words, only within two years will you slightly exceed your 2% goal.
In his speech, Calviño highlighted precisely this “normalization of monetary policy” and praised the speed of decision-making: “It is very positive that the ECB acted quickly and decisively to curb speculation in order to avoid fragmentation of the European debt markets. With this mention he was referring to the announcements made last Wednesday after an emergency meeting of the Governing Council. After risk premia soared following the announcement of interest rate hikes last week, particularly in Italy, the Eurobank gave the green light to maturities of the debt of the defunct Pandemic Response Program (PEPP) to reinvest “flexibly” ) in order to allocate it mainly to the countries that suffer the most from the attacks of the markets, including Greece. And in a second phase, a new anti-crisis mechanism will be introduced.
Regarding Spain’s debt, the First Vice President has assured that only 15% of the country’s debt portfolio remains to be funded this year. In other words, only this part will be subject to higher interest due to the interest rate hike. And he commended the Treasury Department’s work during these prosperous years in the markets. “We have used a scenario of negative interest rates to prepare for the necessary normalization of monetary policy,” he stressed. According to Calviño, the average rate of outstanding debt is currently below 1.6% and the average maturity of the doubts has been extended to eight years.
brake on credit demand
Carlos Torres, President of the BBVA, also attended the opening session of the courses organized by the APIE. For his part, the director of the bank confirmed that thanks to the commitment of the Eurobank, the next rate hikes will not lead to excessive increases in risk premiums. In addition, he has given assurances from the banking sector that these increases are supportive of business. Although he has warned of a less flattering counterpart: “We’ll have to see how the volume of credit demand evolves, but it’s reasonable to assume that it will weaken due to interest rate hikes and the uncertainty that exists”.
The other part of this so-called monetary normalization will be the impact it has on crime. According to the Banco de España, almost 25% of loans to companies in sectors affected by the pandemic and the energy crisis are in default or under special surveillance (€21,475.8 million). Some of them are currently supported by the Official Credit Institute (ICO) parachute of government guarantee, although in many cases it is just a nudge that will not solve the problem. Despite this, the President of BBVA assured that these ICO credits are doing very well. “Companies are doing very well thanks to a strong economic recovery,” Torres said.