ECB’s de Cos: Direction of Monetary Policy Is Clear, But Change Will Be Gradual

8 February 2022

By David Barwick – FRANKFURT (Econostream) – The direction of the European Central Bank’s monetary policy is clear, but it would be wrong to make assumptions about timing, and the pace will be gradual in any case, ECB Governing Council member Pablo Hernández de Cos said Tuesday.

In a speech at a meeting of the alumni association of a Spanish university, de Cos, who heads Banco de España, said, ‘And I think it is also very important to stress that in this context of uncertainty and with medium-term inflation expectations showing no risks of de-anchoring to the upside, any normalisation of monetary policy must be very gradual.’

‘All our measures of the economy's natural nominal interest rates are very low, which also adds to the need to maintain gradualism’, he said. ‘The direction of where to steer our monetary policy is clear, but I think we should not jump to conclusions about its timing, it will be gradual and it will also be data-dependent.’

In explaining the Governing Council’s thinking last week, de Cos noted the ‘further upward surprise in inflation’ of December and January, and said that this included core inflation as well. Moreover, he said, energy futures had risen compared to December for all of this year.

Higher 2022 inflation raises the likelihood of second-round effects, especially given positive labour market developments, he said.

‘And therefore, that also implies that risks to inflation are skewed to the upside, particularly in the short term, at least as long as this current episode of high volatility and high energy prices persists’, he said.

A more moderate medium-term outlook is still valid, he said. ‘Over the past few months, the likelihood of medium-term inflation being in the vicinity of 2% has probably increased, but there is no perceived risk of inflation being persistently above that level in the medium term’, he said.

Under high uncertainty, ‘more than ever, it is necessary to maintain optionality, it is necessary to maintain flexibility and it is necessary to maintain dependence on incoming information in order to adjust the monetary policy stance appropriately’, he said.

De Cos emphasised that all three conditions of the ECB’s forward guidance must be met simultaneously to ‘avoid a premature tightening of our monetary policy.’