ECB’s de Cos: Financial Tensions One of the Main Risks Facing Central Banks

12 April 2021

By David Barwick – FRANKFURT (Econostream) –  Financial tension and tighter financing conditions in the context of high public and private debt are among the principal challenges global monetary policies will have to cope with, European Central Bank Governing Council member Pablo Hernández de Cos said Monday.

In a speech at a central banking conference posted to the website of Banco de España, which he heads, de Cos said that given ‘high uncertainty and still fragile economic conditions, monetary policies should continue to contribute to maintaining favourable financing conditions, which will help to underpin the strength of the recovery.’

The further evolution of the pandemic could yet lead to setbacks, as could its impact on corporate and household creditworthiness, he said. Moreover, he said, there could still be ‘possible adverse developments in financial markets, as witnessed, for example, by the increase in long-term interest rates in various parts of the world in recent months.’

‘The possibility of financial market tensions and a tightening of financing conditions, against the background of a significant increase in public and private debt, is one of the main risks facing central banks in both advanced and emerging market economies’, he added.

While ongoing vaccination meant that ‘[t]he health crisis is likely to be resolved and, consequently, the incipient economic recovery is likely to continue’, led by the US and China, he said, ‘these favourable prospects coexist with high uncertainty on several fronts’, including new virus variants, heterogenous progress in immunisation, and divergent paces of recovery.

Variations in the speed of recovery was dangerous for vulnerable countries, he said. ‘A premature tightening of international financial conditions could seriously hamper the recovery efforts of economies with limited domestic policy space, which could delay their recovery and ultimately adversely affect the global economy as well.’

De Cos urged that policy support be maintained as long as needed, ‘adapting them to changing circumstances in the different countries, until the recovery has taken hold, and only then … cautiously withdrawn.’

It is also unclear how much scarring the crisis has caused, ‘particularly in those sectors and countries most affected and where it is proving most persistent’, he added.