ECB’s de Cos: Haven’t Reached the End of Rate Hikes Yet; Long-Term Expectations Firmly Anchored
2 November 2022
By David Barwick – FRANKFURT (Econostream) – The European Central Bank will have to undertake additional rate hikes, but long-term inflation expectations are still well anchored, Governing Council member Pablo Hernández de Cos said Wednesday.
In an interview with German daily Frankfurter Allgemeine Zeitung, de Cos, who heads Banco de España, said that the ECB had ‘made significant progress in unwinding monetary accommodation’.
‘But we must bring interest rates to levels that allow inflation to return to our medium-term target of 2%’, he continued. ‘And we haven't reached the end here.’
The ECB’s policy reaction reflected the different nature of inflation in the euro area compared to the US, he said.
‘And despite the surge in inflation, long-term inflation expectations remain firmly anchored, which I believe demonstrates that our response has been appropriate’, he added.
Still, de Cos warned that inflation was partly driven by demand and that ‘the size and duration of the inflation spurt is exceptional and price pressures have spread to the rest of the basket’, making second-round effects likelier.
‘Looking ahead, we will take into account our earlier decisions - as well as the fact that they have a lagged effect on economic activity and inflation’, he continued. ‘And of course our future decisions will depend on inflation forecasts. These, in turn, depend on the economic outlook and thus, as we are currently observing, on the higher probability of a recession.’
The terminal rate was unknowable, given ‘enormously high’ uncertainty, he said. In any case, ‘we still have a good bit of the way before us’, he said. ‘But this depends on the inflation outlook and is accordingly data-driven. As for the neutral interest rate, I see it as a communication tool. If you compare it with current interest rates, you can draw conclusions about whether we are already in a more or less restrictive area.’
Though agreeing that ‘[a]t some point we have to start reducing our APP portfolio’, the ‘main principles’ of which he said would be decided in December, de Cos urged that it be done ‘very carefully and very gradually.’
‘Especially because we don't have much evidence on the impact’, he elaborated. ‘First of all, we have to draw conclusions from the balance sheet reduction that follows from the decision to change the terms of the TLTRO bank long-term loans. We will also need to consider the reduction in the APP stock in the context of our interest rate path to create financial conditions consistent with achieving our inflation target.’