ECB’s de Cos: Generalised Fiscal Impulse Would Force Stronger Monetary Policy Reaction

7 March 2023

By David Barwick – FRANKFURT (Econostream) – The European Central Bank would have to react more strongly with monetary policy if fiscal policy were to be generally expansionary, Governing Council member Pablo Hernández de Cos said Tuesday.

In an interview with Spanish business daily Cinco Días, de Cos, who heads Banco de España, said that ‘medium-term inflation expectations have remained anchored around our target and we have so far not observed widespread second-round effects.’

Still, he urged caution again, noting that pandemic savings had diminished, monetary policy tightening had yet to unfold its full impact, geopolitical certainty remained high and ‘persistent inflation increases the likelihood of second-round effects, which, should they materialise, may require further monetary policy tightening.’

‘A generalised fiscal impulse would lead to higher inflationary pressures and force a stronger monetary policy reaction’, he said. ‘And, of course, as energy prices decline and activity strengthens, it is important to start reversing such measures without delay.’