ECB’s de Cos: Potential Dis-anchoring of Expectations Main Risk of Persistent Inflation
12 January 2022
By David Barwick – FRANKFURT (Econostream) – The European Central Bank needs to be attentive to a potential disanchoring of inflation expectations, the chief possible source of more persistent high inflation, ECB Governing Council member Pablo Hernández de Cos said Wednesday.
Speaking at Spain Investors Day in Madrid, de Cos, who heads Banco de España, said that the fading out of base effects and more subdued energy prices should mitigate inflationary pressures through the current year, but that ‘there are two sources of risk that could generate a more lasting inflationary process.’
One of these is that energy prices do not calm down in line with futures markets, perhaps for geopolitical reasons, while the other is second-round effects, even if for now, ‘wage cost growth is subdued’, he said.
‘[R]ecent developments remain consistent with a return to moderate inflationary pressures in the medium term’, he said. ‘Nevertheless, we should pay attention to the possibility of the emergence of signs of a disanchoring of expectations, as this would be the main factor that would make this episode of high inflation more persistent.’
The decision last month by the ECB to end the pandemic asset purchase programme (PEPP) in March ‘reflects the fact that the negative impact of the health crisis on the medium-term inflation trend is considered to have been overcome’, he said. The associated increase in the asset purchase programme (APP) will ‘facilitate a smooth adjustment’, he said.
‘In any case, given the high degree of uncertainty, we continue to maintain a high degree of optionality and flexibility in the conduct of monetary policy’, he said, pointing to the option of PEPP reactivation and the ability to conduct PEPP reinvestments at will by jurisdiction.
‘And, finally, our forward guidance, which makes the first interest rate increase and the end of the purchase programme conditional on the evolution and forecasts of inflation at any given time, is also maintained as a key reference’, he said. ‘It is in this sense that our statement should be understood that, if today's conditions regarding the evolution of core inflation and inflation expectations hold, we do not expect rate hikes in 2022.’
The Omicron coronavirus variant illustrates that circumstances are not back to normal and that uncertainty is high, he said. The Spanish economy, though set to ‘continue at a good pace over the next three years’, will slow in the short run as a consequence, but thereafter will accelerate, he said.
The expected Spanish growth trajectory ‘would lead to GDP recovering to its pre-pandemic level between the end of this year and the beginning of next’, he said. ‘The main source of uncertainty obviously remains the pandemic, although it must be recognised that, in terms of its economic impact, the degree to which economies have adapted to it has increased with successive waves.’