ECB’s de Cos: If Risk of Second-Round Effects Materialises, May Need More Monetary Tightening

7 March 2023

By David Barwick – FRANKFURT (Econostream) – The European Central Bank might need to tighten the monetary policy screws yet further if the risk of second-round effects, already heightened due to persistently elevated inflation, were to materialise, Governing Council member Pablo Hernández de Cos said Tuesday.

In a speech at a financial event in Madrid, de Cos, who heads Banco de España, called it ‘highly likely that the real GDP growth forecasts for the Spanish economy for 2023 that we will publish in the coming weeks will be revised upwards with respect to those of December, while those for headline inflation will be revised downwards.’

The outcome of the Spanish macroeconomic projection exercise was ‘likely to reinforce our impression that underlying inflationary pressures will remain high in the short term and will only moderate gradually in the coming quarters’, he said.

Economic resilience was also seen at the level of Europe as a whole, he said, thanks to the more vigorous-than-expected rebound from last year’s negative supply shock.

‘We have seen a very significant decline in energy prices, in a context where the winter has been mild and energy supply constraints have eased’, he noted in this context. ‘Bottlenecks in supply chains have also eased appreciably.’

However, he said, ‘we need to remain very cautious: the savings accumulated during the pandemic are diminishing, the effects of monetary policy tightening have not yet been fully felt, geopolitical uncertainty has not abated, and persistent inflation increases the likelihood of second-round effects, which, should they materialise, may require further monetary policy tightening.’

‘All in all, despite the improved outlook, the level of uncertainty and risks to financial stability remain elevated’, he added.