ECB’s de Cos: Nothing Has Changed About Our Intention to Take Rates to Neutral Level

22 July 2022

By David Barwick – FRANKFURT (Econostream) – Yesterday’s larger-than-expected rate hike by the European Central Bank does not alter the ECB’s determination to take official borrowing costs to neutral, Governing Council member Pablo Hernández de Cos said Friday.

In an interview with Spanish public radio and television RTVE, de Cos, who heads Banco de España, explained the surprisingly large move by invoking inflation data that ‘have been worse, that is, higher than what we were initially expecting.’

The other ‘very important’ factor behind the decision was the new anti-fragmentation tool, as this makes authorities ‘more confident’ about their ability to safeguard transmission, he said.

‘What we did yesterday is anticipate our exit from negative interest rates’, he said. ‘And this nevertheless is very important: it does not change at all our intention to continue with the normalisation of monetary policy until precisely when interest rates are at what we consider neutral.’

The pace of normalisation now ‘depends precisely on economic developments and in particular, obviously, on the dynamics of inflation’, he said. ‘And of course also on the macroeconomic situation, on economic growth, because economic growth also has economic implications for inflation.’

The political situation in Italy ‘did not have any influence’ on the creation now of the Transmission Protection Instrument, he said.

‘The most important thing that has to be underscored at this moment after the approval yesterday of the creation of this instrument is the importance of its creation’, he said. ‘With it, we are recognising in the European Central Bank that maintaining homogeneous conditions in the whole euro area is a prerequisite for financial stability.’