ECB’s de Cos: Economic Outlook Has Significantly Darkened; Fulfilling our Mandate is Crucial

31 October 2022

By David Barwick – FRANKFURT (Econostream) – Growth prospects have worsened considerably lately, making it more essential that the European Central Bank do its duty and ensure price stability, Governing Council member Pablo Hernández de Cos said Monday.

According to a speech text prepared for his participation in the 7th Annual Conference of Mediterranean Central Banks in Istanbul, de Cos, who heads Banco de España, said that ‘we are once again in a highly uncertain environment.’

‘Indeed, the economic outlook has significantly darkened in recent months’, he said, citing inflation, slower growth and tighter financing conditions, all against the backdrop of Russian military aggression.

‘As a consequence, recession risks are spreading, and there is considerable volatility in financial and commodities markets’, he said.

‘At the current juncture, decisive economic policies are more important than ever’, he continued. ‘From the perspective of central banks, fulfilling our mandate of ensuring price stability is crucial. Decisive action by us in the current juncture will support medium-term growth, by reducing inflationary pressures and avoiding a de-anchoring of inflation expectations.’

Clear and transparent communication is required for smooth financial market operation, he added.

Whilst governments should help those most exposed, fiscal support should be limited in time and targeted, he urged.

‘In particular, we need to avoid a general fiscal stimulus that amplifies current inflationary pressures or a permanent increase in fiscal imbalances that would weigh on public debt sustainability’, he said. ‘In other words, consistency between fiscal and monetary policy is of the utmost essence.’

Uncertainty and volatility exacerbate the risks that policy will make an error and upset financial markets, because of which policymakers must ‘stand ready to adjust policies depending on how the situation evolves’, he said. ‘This is clearly how monetary policy is currently being conducted, with data-dependent decisions being made on a meeting by meeting basis, but this may be more difficult to achieve in the case of fiscal policy, given the longer implementation lags involved.’