ECB’s de Cos: Expect to Continue to Hike Rates Significantly at a Sustained Pace
11 January 2023
By David Barwick – FRANKFURT (Econostream) – The European Central Bank expects to implement further significant monetary policy tightening by hiking at a sustained pace, Governing Council member Pablo Hernández de Cos said Wednesday.
In a speech at Spain Investors Day in Madrid, de Cos, who heads Banco de España, said that the Council ‘expects to continue to raise interest rates significantly at future meetings, at a sustained pace, until they reach sufficiently tight levels to ensure that inflation returns to the 2% target over the medium term.’
The need to further increase official borrowing costs can be justified by considering the question of what level these have to rise to so as to restore price stability, he said. The latest staff forecasts show euro area HICP at 2.3% in 2025, despite being based on a higher expected terminal rate than the previous set, he said.
‘If these projections are taken as valid, this would indicate that achieving the inflation target over the medium term would require an increase in interest rates above what the market expected at the time’, he reasoned.
Markets are now effectively expecting a terminal rate ‘somewhat below’ 3.4% and thus higher than previously, he said.
Given elevated uncertainty, the ECB will take decisions on a data-driven, meeting-by-meeting basis, he said.
In February, the Council will also come up with the details of its drawdown of holdings under the APP, ‘the pace of which will in any case be measured and predictable’, he said. ‘The pace of portfolio reduction after the second quarter will be determined at a later date. In any event, we will review the pace of APP portfolio reduction on a regular basis, not only to ensure consistency with the monetary policy stance, but also to preserve market functioning and maintain a firm grip on short-term money market conditions.’
Despite the slowdown of headline inflation last month, the core measure stood at a record high and above the level of the previous month, he observed. In the current year, fiscal measures ‘are expected to moderate inflation during 2023, but will increase it when they are withdrawn, potentially making the inflationary episode more persistent’, he cautioned.
If fiscal support were too generalised, this could feed price pressures and necessitate ‘a more determined monetary policy response’, he said. ‘In the current situation, consistency between fiscal and monetary policy is crucial.’
Long-term expectations continue to point to inflation of around 2% for the most part and are thus anchored, ‘although further revisions of some indicators above the target require continued monitoring’, he said.
De Cos noted that ‘the European economy is showing greater resilience than expected a few months ago’, which ‘is particularly evident in the labour market’.
Were there to be a euro area recession, ‘it would be relatively short and shallow’, he said, pointing to the latest macroeconomic projections. ‘This view seems to be confirmed by the most recent data releases.’
Activity would pick up in the second half, he said.