Banco de España: Need Very Accommodative Monetary Policy for Coming Quarters

13 May 2021

By David Barwick – FRANKFURT (Econostream) – Weak price pressures and the fragile nature of the economic recovery in the euro area suggest that monetary policy needs to remain very accommodative for now, according to Banco de España.

In its 2020 annual report, released Thursday, Banco de España worried about downside risks to the recovery from new virus mutations and from the behaviour of companies and consumers in a post-pandemic world.

‘The fragility that still characterises the economic recovery process and price dynamics in EMU recommends maintaining a very accommodative monetary policy stance in the coming quarters’, the Spanish central bank said, observing that the ECB considered favourable financing conditions essential for the duration of the pandemic.

Inflation in the area is still far removed from the ECB’s price-stability objective, it said. ‘In this regard, the ECB has reiterated that it stands ready to adjust all its instruments to ensure that inflation moves steadily towards its target’, it added.

Uncertainty about the global and euro area economies is ‘significant’, the central bank said. Although vaccination campaigns have ‘largely dispelled doubts about the evolution of the pandemic, especially in developed countries’, it said, downside risks persist, related to uneven vaccination globally and the potential for vaccine-resistant virus mutations.

‘Beyond health issues, there is also high uncertainty about how companies and households will adapt their production and spending patterns once the pandemic is over’, Banco de España said. ‘The extent of the fallout from the current deep economic crisis in the form of damage to the productive capacity of economies and macroeconomic imbalances in both the public and private sectors is also highly uncertain.’