ECB’s de Cos: Must Hike Rates Significantly at Coming Meetings and then Maintain Terminal Rate

22 January 2023

By David Barwick – FRANKFURT (Econostream) – The European Central Bank expects to hike rates significantly at the next monetary policy meetings and then maintain the terminal rate for a period of time, Governing Council member Pablo Hernández de Cos said Sunday.

In an interview with Spanish national daily ABC, de Cos, who heads Banco de España, said that to restore price stability, ‘we now need to stay the course’, but that ‘it is also important that fiscal policy go hand in hand’ with monetary policy and avoid ‘a generalised fiscal impulse that generates additional pressure on inflation.’

Though inflation would go on slowing, it would continue to exceed the ECB’s 2% target, he said.

‘Interest rates will rise to levels that allow us to ensure that inflation returns to the 2% target in the medium term’, he said, even if ‘current uncertainty is so high that it is not really possible to give precise guidance’ on these levels.

‘But, with the information we have at the moment, to achieve that target, we believe that it will be necessary to continue to raise interest rates significantly in the coming meetings and that, once reached, we will have to maintain that "terminal" level for some time’, he said. ‘The most important message is that we have not yet reached the end.’

De Cos acknowledged the increased economic optimism, noting among various reasons that ‘bottlenecks in global supply chains have eased appreciably and gas and oil prices have moderated significantly’, alongside ‘favourable labour market performance’.

‘As a result, the economy has shown greater resilience’, he said. ‘But caution remains warranted. The outlook continues to show a significant slowdown in growth in 2023 compared to last year and uncertainty remains extraordinary.’

In both Spain and other advanced economies, labour markets are ‘proving highly resilient, although a slowdown in line with economic activity is to be expected’, he said.