ECB’s de Cos: Still Have ‘Some Way to Go’ in Monetary Policy Normalisation
2 November 2022
By David Barwick – FRANKFURT (Econostream) – The European Central Bank still has ‘some way to go’ on its journey of monetary policy normalisation, Governing Council member Pablo Hernández de Cos said Wednesday.
In a speech in Madrid on the acceptance of an award, de Cos, who heads Banco de España, said that monetary policy normalization had ‘already achieved considerable progress’, to which he appeared to attribute the circumstance that ‘despite the significant increase in inflation, long-term inflation expectations have remained well anchored at 2%, although some indicators show developments that require continued monitoring.’
Still, he said, ‘additional interest rate increases’ would be needed. ‘In other words, we still have some way to go.’
There can be however ‘no answer’ under conditions of such ‘enormous uncertainty’ to the question of the terminal rate, he said. This and the speed with which it is attained ‘will depend on the inflation outlook, which, in turn, depends on the growth outlook and therefore includes the higher probability of recession that we are now estimating.’
‘And it will also depend on the decisions we have taken in recent months and the lags in the transmission of their effects’, he added. ‘Future decisions will therefore depend on the data we receive, consistent with the "meeting-by-meeting" approach we have adopted.’
A reduction of the ECB’s balance sheet would have to start ‘at some point’, with decisions concerning ‘the key principles of this reduction as regards the APP’ to be made by the Governing Council in December, he said.
The reduction should be ‘cautious’ and ‘very gradual’, he urged, ‘given the limited evidence we have on its effects.’ The ECB should first study the balance sheet reduction stemming from last week’s decision by the Council to change the conditions of the TLTROs, he said.
De Cos noted the recent economic slowdown globally and, in the wake of monetary policy turnarounds in major jurisdictions, the ‘significant tightening of global financial conditions’.
‘In the case of the euro area, there has also been a significant slowdown in growth in the third quarter and we expect further weakening in the remainder of the year and in the first part of 2022’, he said.
High euro area inflation, whose ‘magnitude and persistence are extraordinary’, also has a demand-side component to it, he said, and has become more broad-based.