ECB’s de Cos Stresses Readiness to Take New Steps, Notes Euro Rise

1 October 2020

By David Barwick – FRANKFURT (EconoStream) – European Central Bank Governing Council member Pablo Hernandez de Cos on Thursday emphasised the willingness of the ECB to defend the stability of prices against the backdrop of a strengthening euro.

In a speech at a meeting of the alumni of Deusto Business School in Madrid, de Cos, who heads the Bank of Spain, repeated his assertion that the firmer euro had undone a significant portion of the ECB’s monetary accommodation.

The recent ‘progressive appreciation of the euro … introduces disinflationary pressures at a time when the inflation outlook for the euro area is … already historically low’, he said. ‘For this reason, in the Governing Council of the ECB we have emphasized that we will closely follow the evolution of the exchange rate.’

Given the recovery’s fragile nature, projected medium-term inflation below the ECB’s objective and exchange rate developments that have ‘offset a good part of our stimulus,’ he said, ‘there is no room for complacency.’

Besides maintaining ‘significant monetary stimulus until we achieve a solid recovery’, he said, ‘we are willing to recalibrate the previous measures, or to introduce new ones if necessary, to fulfil our mandate of price stability, always understood in a symmetrical way.’

All authorities must realize that removing policy support prematurely would impair European productive capacity as well as the financial system to an extent more costly than keeping the support in place over the medium term, he said. Depending on circumstances going forward, enhancing support might be needed, he added.

De Cos described the effect of the ECB’s pandemic emergency purchase programme (PEPP) as ‘crucial’ for buying fiscal policy time to act.  The easing of financial conditions thanks to the PEPP ‘continues to the present’, he said.

The ECB has stated its readiness to adjust the PEPP again according to conditions, he noted.

Turning to the economy, de Cos said predominantly downside risks to growth included uncertainty about the pandemic, Brexit and the impact of the expiry of measures taken to support the economy.

The recovery is partial, uneven and fragile, he said, observing the resurgence of Covid-19 in some countries and the consequent reinstitution of economically inhibiting containment measures.

‘In fact, the most recent activity indicators, such as the PMI or the European Commission's economic sentiment index, reflected a certain slowdown in activity in August, after the rebound in July’, he said. ‘As a result, the recovery is subject to enormous uncertainty.’