ECB’s de Cos: Low Rates in Recent Years Plus Longer AWM to Mitigate Cost to Sovereign of Rate Hikes

10 May 2022

By David Barwick – FRANKFURT (Econostream) – Interest rate hikes by the European Central Bank on the order of 100 basis points should boost the interest burden of Spanish sovereign debt by only 0.4 point in 2024, thanks to relevant trends of recent years, ECB Governing Council member Pablo Hernández de Cos said Tuesday.

‘High debt levels also entail greater sensitivity of public finances to interest rate movements’, de Cos, who heads Banco de España, said in a speech at a banking sector conference. ‘However, the low levels of interest rates in recent years have led to a continued decline in the interest burden as a percentage of GDP, while the lengthening of the average maturity of debt limits the short-term impact of increases in issuance costs.’

‘In a scenario consistent with the latest projections in which interest rates rise gradually, the debt burden as a percentage of GDP would stabilise’, he continued. ‘On this scenario, an additional 100 bp increase in both short- and long-term interest rates, all other things being equal, would lead to an increase in interest payments of four-tenths of a percentage point of GDP in 2024.’

De Cos noted the uncertainty regarding both the intensity and duration of the geopolitical tension caused by Russia’s attack on Ukraine.

The price rises triggered by the war as well as the blow to trade and confidence had led Banco de España to downgrade Spanish GDP growth this year and next and to hike expected 2022 inflation, he said.

‘From the banking sector's perspective, direct exposures to Russia and Ukraine are very small, but the effects can be significant’, he said.