ECB’s de Cos: Will Remain Extremely Vigilant About Inflation Expectations

26 September 2022

By David Barwick – FRANKFURT (Econostream) – The European Central Bank will remain extremely vigilant when it comes to inflation expectations, European Central Bank Governing Council member Pablo Hernández de Cos said Monday.

In a speech in Toledo, Spain, de Cos, who heads Banco de España, broke little new ground, largely confining himself to the same messages delivered in much the same language as in another speech one week ago.

In the euro area, he said, authorities should keep a watchful eye out for a possible de-anchoring of expectations, which would induce firms and workers to make decisions that lead to more inflation and ultimately ‘would force monetary policy to take even stronger action.’

‘So far, we have seen no signs of expectations de-anchoring, but there are some signs to watch out for’, he said, noting that the ECB's monthly survey of consumer expectations most recently showed median 3-year inflation expectations at 3%, versus just above 2% at the beginning of the year.

‘We will remain extremely vigilant to these indicators in the coming months’, he said. ‘Indeed, the need to protect ourselves against this risk is one of the reasons for the acceleration in monetary normalization that our latest decisions have entailed.’

Second-round effects are not yet evident, ‘at least not across the board, although the current high inflation increases the likelihood that they will occur’, he said.

How much the economy slows and how this affects wages and corporate profitability ‘will be a key determinant of the medium-term inflation outlook and, therefore, of our monetary policy decisions’, he said.

‘Ultimately, our forthcoming decisions will be based on the new information available to us and its implications for the achievement of our medium-term inflation target, consistent with the "meeting-by-meeting" approach we have adopted’, he said, repeating his speech of last Monday word for word.

‘In any case, interest rates should reach a level that will allow us to ensure a progressive convergence to our medium-term inflation target, and the speed at which we reach that level will be conditioned by the same target’, he added. ‘Whether this means reaching interest rate levels close to neutral or above will therefore depend on this same objective.’

He said that there was general ‘concern about the possible effects of the current simultaneous tightening of monetary policy in a very large number of geographic areas.’

Although each individual central bank was proceeding as demanded by its jurisdiction’s ‘very high and very persistent inflationary pressures’, he said, ‘the simultaneous tightening raises the question of whether, in such an interconnected world, this may not lead to an overly restrictive monetary policy stance at the global level, particularly for emerging economies.’