ECB’s de Cos: Financial Tensions Could Lead to Reduced Growth and Inflation
27 March 2023
By David Barwick – FRANKFURT (Econostream) – The recent financial tensions could cause a tightening of financial conditions that dampens growth and inflation, European Central Bank Governing Council member Pablo Hernández de Cos said Monday.
In a speech in the Spanish city of Valladolid, de Cos, who heads Banco de España, said that ‘it should be stressed that, as in the case of the euro area, uncertainty is very high and has intensified as a result of the recent bout of financial tensions, the effects of which are not incorporated either in the ECB's projections for the euro area or in those of the Banco de España for the Spanish economy.’
‘Such tensions, if prolonged, could lead to a scenario of more moderate economic growth and a faster fall in inflation’, he added.
Under such high uncertainty as currently prevails, ‘it makes sense to stress that our future monetary policy decisions will depend more than ever on how the various sources of risks, including those experienced in recent days in financial markets, materialise’, he said.
Future policy moves will be based on inflation prospects, with these hinging on economic and financial developments, the evolution of core inflation and how well monetary policy is transmitted, he said.
On the latter, he said, ‘the tensions in the financial markets that we have seen in recent days may have a direct impact, generating a further tightening of financial conditions and affecting, downwards, the outlook for economic activity and inflation.’
These were ‘[d]evelopments to be taken into account at our next meetings’, he said.
In any event, the ECB remains ‘ready to respond as and when necessary to maintain price and financial stability in the euro area’, he said. ‘In particular, if necessary, we will provide sufficient liquidity support to the euro area financial system and counter any threat to monetary policy transmission.’
De Cos noted that one outcome of the 2021 strategy review was the underscoring of the necessity of financial stability for price stability.