ECB’s de Cos: Unlikely Economy on Verge of Sustained Higher Inflation Rates

29 March, 2021

By David Barwick – FRANKFURT (Econostream) – It is improbable that the economy is on a verge of a period of sustained higher inflation rates, European Central Bank Governing Council member Pablo Hernández de Cos said Monday.

In a speech at a breakfast meeting, de Cos , who heads Banco de España, said that the ECB’s recent decisions led him ‘to emphasize the importance of maintaining a high degree of monetary accommodation so that fiscal policy can, in turn, continue to maintain a very high degree of support for the economy until a solid recovery has been guaranteed.’

Noting the recent discussion about whether the economy might be entering a period of higher inflation could, de Cos argued that this was ‘unlikely given weak demand and the high degree of cyclical slack.’

The ECB’s inflation projection foresaw HICP at end-2023 still ‘far from the medium-term objective’, he said.

Turning to the ongoing strategic review of the ECB, de Cos said that the current inflation objective ‘must be reformulated’ so as ‘to clarify the level of inflation that is intended to be achieved - for example, 2% - to facilitate its understanding by citizens and allow a sufficiently high buffer, above zero, that gives more room for manoeuvre to the interest rate policy.’

At the same time, the objective must become more symmetrical, so that everyone knows that the ECB will respond equally to deviations in any direction and that it wants ‘to achieve symmetrical results in the evolution of inflation around that goal’, he said.

Short-term economic risks remain to the downside, he said, and have to do with the pandemic and the slow progress towards its medical resolution. Uncertainty beyond the short term is less and the existence of effective vaccines ‘has reduced the probability of materialization of the most unfavourable scenarios’, he said.

‘Uncertainty has also been reduced as a result of the fiscal package approved in the United States and the agreement for the United Kingdom to leave the European Union’, he said. ‘Overall, the risks are more balanced in the medium term than they were a few months ago.’

De Cos cautioned that financial institutes will see their loan portfolios deteriorate ahead.

Although accumulated savings should bolster consumption, ‘the magnitude and timing of this effect is subject to high uncertainty and some elements could limit it’, he said.