ECB Insight: de Cos’ Remarks Show a Certain Evolution, But No Conversion
20 September 2021
By David Barwick – FRANKFURT (Econostream) – A close look at the interview published Sunday with European Central Bank Governing Council member Pablo Hernández de Cos reveals him to be slowly taking on board at least some of the optimism finally infecting the less hawkish side of the Council. By no means has he undergone a full-bore conversion.
In the interview with Spanish daily El Diario Vasco, de Cos, who heads Banco de España, said that Spain’s economic recovery was ‘still on track’ for ‘very significant’ rates of growth this year and next.
Particularly notable was his answer to the follow-up question of whether Spain’s central bank would, in view of the outlook, hike forecasts. Indeed, he replied, ‘[t]here could be some room for manoeuvre’ given the better-than-expected second quarter and the recent upgrades to the ECB’s projections.
‘And while uncertainty is still high, it is lower than a year ago. than a year ago’, he continued.
That is a noteworthy concession coming from him. Much more typical for him at such a moment would be an exhaustive litany of perceived threats to the economy, such as in a speech he gave in early July in which he also said that progress in vaccinating citizens should allow ‘robust growth in the coming quarters’.
‘However’, he immediately added at the time, ‘there are still important elements of uncertainty, associated both with the evolution of the pandemic itself and with the behaviour of private consumption, tourism flows, the impact of the NGEU funds on the economy and the damage to the productive fabric caused by the pandemic.’
‘In this context, there is still a risk of a more significant deterioration in credit quality in the future than observed so far, especially in those sectors most affected by the pandemic, and in particular once the support measures are gradually withdrawn’, he continued back then, ever ready to assume the role of Cassandra.
Of course, it is just a generally accepted fact that the situation has improved in the meanwhile. But de Cos has always been among those least inclined to acknowledge any developments that would make it appropriate to reduce monetary support.
Indeed, for de Cos, macroeconomic uncertainty has been more akin to a weapon to be deployed in the defence of maximally accommodative monetary policy, a weapon he is unlikely to relinquish with anything but great reluctance.
In an interview he gave at the end of July, uncertainty still seemed to dominate his thinking. ‘Against a background of still very high uncertainty as at present, we should not get ahead of ourselves with this discussion’ of the pandemic emergency purchase programme (PEPP), he said.
In contrast, he maintained an uncharacteristically optimistic vein in the latest interview over a number of sentences, observing that ‘we have seen that the new waves of the pandemic … have had less of an economic impact. Economies have gained adaptability.’
Perhaps inevitably, de Cos eventually reverted to type: ‘The overall picture is positive, but it is true that there are elements of uncertainty that, if they were to materialise, could jeopardise the pace of recovery. Bottlenecks in the supply of some inputs to industry are one such element.’
The reversion wasn’t quite complete, as he then suggested that these problems were likely to prove ‘fundamentally transitory’.
Still, he couldn’t resist either warning of what would happen otherwise (‘they would end up affecting growth’) or, in particular, coming to a characteristic conclusion: ‘This is one more reason to remain cautious and maintain an expansionary monetary and fiscal policy stance.’
To speak of a conversion would thus be misplaced. The ranks of doves on the Governing Council may shrink, but if need be, de Cos will hold the fort alone and continue to resist the arguments in favour of less monetary accommodation. At least, that is where things stand today.