ECB’s de Cos: Euro Strength Has Undone Much Monetary Accommodation

27 September 2020

By David Barwick – FRANKFURT (EconoStream) – The appreciation of the euro has undone much of the accommodation of European Central Bank monetary policy, ECB Governing Council member Pablo Hernandez de Cos said on Sunday.

In an op-ed piece for Spanish daily La Razón, de Cos, who heads the Bank of Spain, said that substantial accommodation will be necessary until the economic recovery is on solid ground, and that the ECB has to be open to additional policy moves.

‘[I]n addition to the risks that the pandemic continues to pose in the euro area, expected inflation over the medium term is much below our target, and in recent months exchange rate developments have offset much of our stimulus’, he wrote.

‘There is therefore no room for complacency’, he continued. ‘We will need to maintain significant monetary stimulus until the recovery is solid and we can ensure that our mandate is fulfilled, while not ruling out the need for further measures.’

De Cos’ assessment of the impact of the euro’s strength is reminiscent of last week’s comment by ECB Executive Board member Fabio Panetta that ‘[t]he sustained appreciation in the external value of the euro has brought about an undesirable tightening of financial conditions and has offset some of the monetary accommodation provided by our measures.’

De Cos warned that while the banking sector has so far mitigated rather than amplified the crisis, rising credit risk impairment is ‘foreseeable’ and authorities will have to ‘act decisively’ if this occurs.