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What needs to be done to contain inflation? A rental agreement is required

This week the macro situation is based on the FED meeting. The economic moment is highly dependent on the evolution of inflation, both in the US and Europe. What are your forecasts for the CPI in Spain and when will inflation peak?

Our forecasts are very much in line with the consensus. We believe it will remain above double digits for a few more months but we will peak at the end of the year so that a small plateau is created during the first quarter of the year and then it gradually corrects until certain base effects start . take effect, as We cannot forget that the energy price rally started in February 2021 and we have an effect that will soften the path of increases.

On the other hand, we are seeing that the rise in prices is more continuous than we might have thought at the beginning of the war, but inflation expectations are anchored and wage negotiations are very timid, and as so there are no second round effects and around 2Q of the year we will see a significant slowdown in prices. That does not mean we will have a CPI of 1% but something closer to a range of 3-5.5% for the next year.

Do you think that the most appropriate measures are being taken to curb the progress of inflation?

The measures are palliative and short-term improvisations that reflect the lack of structural measures in the past to accelerate our various factors. In order to protect the consumer and the lowest incomes, certain measures of price limits can soften the shock, although I believe that in a very limited way. The real measures for price adjustments or inflation limits must be an income agreement, that is, the public, private and household sectors share the inflationary shock equally and are willing to lose some of our real income and absorb this as quickly as possible. But in the short term, it is necessary to determine certain bands of the CPI basket that are most exposed to families so that there is no social crisis.

Regarding the Central Banks, how do you see it?
The world comes together with certain policies and actions but at the moment they are at different times. Inflation in Spain or Europe cannot be compared to the US, which is inflation on the overheated and demand side of the economy. Due to a tight labor market where jobs are not covered, and core inflation growing above 6%, a major adjustment in rates is needed which will lead to monetary tightening on a negative end at the beginning of the year. Inflation will exceed 4% in the US and peak at 4.5%. I know of no chapter in history where monetary policy adjustments have been soft on the economy.

In Europe, monetary policy does not seem to have the same tone. It must be restrictive but the demand problems are much weaker, these price problems are related to the supply derived from the energy crisis, which has spread a large part of the shopping basket and, when one uses other price measures such as the GDP deflator. it appears that the price rise does not spread throughout the economy. You have to be careful with the policies that are implemented. Although it is necessary to bring the policy to a restrictive end, which could be around 2%, the aggressiveness of the increase and the time frame cannot be similar to that of the FED because it does not involve filtering through excessive demand. It should be implemented by sending the message that prices will be controlled but be aware that it is a supply shock that cannot be mitigated by monetary policy alone.

One of the first responses to the rise in rates is the recovery in Euribor to the highest levels since 2009. How do you see Spanish real estate?

The rise in Euribor is predictable and is on a normal path when there is some monetary policy activity. The Spanish real estate sector is overheated, it is at price levels comparable to what happened in Spain in the 2008 crisis, although the Spanish bank is much healthier, with lower default levels, Spanish households are healthier, there is no extra credit there i guess. this makes them different situations. A real adjustment of the economy is expected linked to the destruction of demand due to price increases, financial costs which could lead to an adjustment of the real estate market. Among other things because this market goes hand in hand with inflation. That must be corrected. So, we will see a downward adjustment in prices, I don’t think they will be as aggressive as we have had in the past and in the short term, mortgage type policies will focus on the variable rate. Although the European Central Bank is normalizing its type of deposits, there will be no compensation for savings. Banks are focused on a different way of doing business.

There are plenty of headlines pointing to a possible recession in Spain.

We are more in favor of seeing a strong slowdown in relative and sustained inflation which is, in some ways, no better news than the recession. The nature of a recession is to bottom out and adjust, usually going higher and then recovering for much of the year. But a very moderate growth in its output means that the employment generation necessary to bring the labor market back to more normal levels does not prove to us that the situation is not very favorable. We see a sharp slowdown in activity at the end of the year with the risk of turning into recession if monetary policy tightens.

One of the major uncertainties facing the European economy is the energy crisis, especially problems with Russian natural gas, weighing on growth prospects. Do you think the EU will have to implement rationing, with selective supply cuts, or do you see a less negative scenario?

Although a negative factor, a significant slowdown in demand is in our favor, meaning that consumer industry will have to produce less to supply all the demand and will need less energy. And that gives some edge to demand consumption. At the family level it also depends. Russia’s problems will not be solved in the short term and we will get some rationing, but I can’t imagine such a strong winter when it is necessary to use a lot of gas. The severe drought and heating in Europe can play into our circumstances in terms of not requiring as much energy. Furthermore, Europe has done its homework on gas storage and I don’t think the rationing is that dramatic.

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