Baseline Implies More Hikes, but Uncertainty Calls for Caution, ECB’s de Cos Says

10 April 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Governing Council member Pablo Hernández de Cos said on Monday that if the central bank’s baseline projections are confirmed, there will still be ground to cover to stamp out inflation.

Speaking in Washington, D.C., Hernández de Cos, who is the Governor of the Bank of Spain, said that the ECB’s projections were subject to uncertainty, and that the central bank was not committed to hiking at its next meeting.

‘[I]f the baseline scenario in the March projections is confirmed, we will still have ground to cover to make sure that inflation pressures are stamped out’, he said.

He warned that ‘these projections are subject to various sources of uncertainty.’ This uncertainty meant the ECB was adopting a data-dependant approach, which he said meant ‘ex ante, that we are neither committed to, nor finished with, further rate hikes.’

Regarding the impact of recent stress in the banking sector, he said ‘the implications have been contained, leading to a certain tightening of overall euro area financial conditions’. These tensions, however, ‘could lead to a sharper than expected tightening of credit conditions and erode confidence and give rise to a scenario of more moderate economic growth and more rapidly declining inflation.’

He called for ‘an appropriate policy mix’ in the Eurozone, including ‘a fiscal stance that, at the aggregate euro area level, is not at odds with the tightening of our monetary policy.’

Expansionary fiscal policy was ‘at risk of driving up medium-term inflationary pressures, which would call for a stronger monetary policy response’, he said.

Upward pressures on inflation were likely to persist for the remainder of 2023, he said. The upward effects of energy and food commodity prices ‘could still be significant in 2023’, and the transmission of increasing costs along the supply chain ‘could take up to a year.’

He said that ‘even if gas prices have returned to levels close to those at the start of the war in Ukraine, the upward effects of gas prices on core inflation could still be significant in the short term.’

‘[T]he data suggest that inflationary pressures continue to broaden’, he said, though he expected that at some point, the fall in energy prices, the improvement in supply chains and moderating demand, ‘should begin to gradually produce reverse effects on inflation.’

There was a chance, however, that ‘the impact of cost decreases on inflation may not be fully symmetrical’, he said.