ECB’s de Cos: Risks to Growth to the Downside, Inflation Risks Tilted Upwards

28 November 2022

By David Barwick – FRANKFURT (Econostream) – The global economy is facing an increased risk of contraction, with risks to growth pointing downwards and those to inflation up, European Central Bank Governing Council member Pablo Hernández de Cos said Monday.

In remarks at a conference in Madrid organised by Spanish financial daily Expansión, de Cos, who heads Banco de España, said that higher inflation had recently ‘become more widespread and persistent’, inducing a monetary policy reaction that has contributed to tighter financing conditions.

A global economic downturn has become more and more likely, whilst inflation forecasts have been hiked, he said. ‘All this, I stress, in an environment of high uncertainty, in which risks to growth are skewed to the downside and risks to inflation to the upside’, he said.

De Cos warned that Spain’s banks could come under pressure as higher interest rates lead to an increase in their loan loss provisions and raise funding costs, but said that an analysis by the Spanish central bank predicated on baseline macroeconomic projections from last month envisioned a sector solvency ratio of about 30bp, or 20bp if a measure now under discussion in Parliament were taken.

Under an adverse scenario, ‘provisions for impairment increase very significantly’, he said. However, despite the associated ‘significant consumption of capital’, he continued, ‘the aggregate solvency of the sector would remain at adequate levels, albeit with heterogeneity across institutions.’

‘The main message that emerges from these simulations is that, in a context of such uncertainty as the current one, in which risks to financial stability have increased and, therefore, the probability of the most adverse scenarios has risen, it is necessary for banks to use the increase in profits that are occurring in the short term to increase their resilience’, he said.

‘In addition, banks should maintain a prudent approach to their provisioning and capital planning policies, and closely monitor macroeconomic developments to enable them to react quickly if the risks under consideration eventually materialise’, he added.