ECB’s de Cos: Crisis’ Persistence Greater than Initially Anticipated

20 October 2020

By David Barwick – FRANKFURT (EconoStream) – European Central Bank Governing Council member Pablo Hernandez de Cos on Tuesday said that the crisis was lasting longer than had been expected and that the pandemic’s persistence was increasing the likelihood of structural damage to the economy.

According to a text provided by the Bank of Spain, which he heads, de Cos told a conference organized by KPMG that the ECB might need to take further steps, given the incompatibility of projected medium-term inflation with the ECB’s definition of price stability.

Macroeconomic developments are subject to a ‘persistence of the crisis greater than initially anticipated’, he said. The resurgence of the pandemic is obligating authorities to maintain and even tighten restrictions, which ‘makes it more likely that undesirable structural damage will occur’, he said.

The ‘enormous degree of uncertainty’ about the pandemic and its economic implications will continue to hinder consumption and investment and thus economic activity and employment, he said.

De Cos warned that in general, removing policy support for the economy would inflict damage that would prove more costly than maintaining support until the recovery is durable.

‘With regard to monetary policy, the fragility and heterogeneity of the euro area's recovery, expected medium-term inflation that is well below our target and developments in the nominal effective exchange rate that have counteracted much of our stimulus in recent months suggest that there is no room for complacency’, he said.

Monetary accommodation must remain ‘significant’ until there is a ‘strong’ economic recovery, he said. ‘Moreover, it cannot be ruled out that previous measures will have to be recalibrated, or new ones introduced if necessary, in order to fulfil our mandate for price stability, always understood in a symmetrical way.’

He continued: ‘In this respect, we should make it clear that an inflation rate of 1.3%, as projected by the ECB for the 2022 horizon, is not compatible with the ECB's inflation mandate.’

Turning to the ECB’s newly resumed strategic review, de Cos reiterated that the price stability definition used by the ECB ‘is subject to reformulation’. It may need clarification that makes it more readily understood and could also be made more clearly symmetrical, he said, thereby ‘making it clear that the degree of tolerance for deviations of inflation above the target will be the same as when such deviations occur below it.’