ECB’s de Cos: To Tighten Significantly Further by Hiking at a Sustained Pace

16 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 repeated Tuesday.

In a speech at a conference in Madrid, de Cos, who heads Banco de España, reiterated that ‘it will be necessary to continue raising interest rates significantly in the coming meetings, at a sustained pace, until we reach levels that allow us to ensure that inflation will return to the target.’

The ECB’s 2025 average HICP projection of 2.3%, being based on where markets thought interest rates were going at the time of the projection exercise, implies that to restore price stability, rates would have to increase more than expected, he said.

Since the latest macro projections were unveiled, markets have added another approximately 25bp to their expectations of the terminal rate, though subtracting the term premium would imply a slightly lower result, he said.

Under current elevated uncertainty, the ECB’s decisions would in any case ‘remain data-dependent and follow an approach in which decisions will be taken at each meeting’, he said.

Where the ECB winds up will depend to a great extent on companies’ and workers’ long-term inflation expectations, he said. If these remain well anchored, then ‘the monetary policy reaction may be less forceful’, he said. ‘Conversely, if they rise above the target, monetary policy will have to act more forcefully.’

So far, he said, ‘second-round effects via wages or margins have been contained, but the greater persistence of inflation has raised the risks of de-anchoring inflation expectations over the medium term.’

De Cos observed the better-than-expected resilience of the European economy and in particular labour markets.