ECB’s de Cos: If High Inflation Persists, Likelihood of Additional Tightening Would Increase

10 May 2023

By David Barwick – FRANKFURT (Econostream) – Were high inflation to prove yet stickier at the level of the euro area, that would make additional monetary tightening even likelier, European Central Bank Governing Council member Pablo Hernández de Cos said Wednesday.

In the foreword to the annual report of Banco de España, which he heads, de Cos said that ‘economic activity has been more resilient than initially expected, and in 2023 to date, signs of renewed momentum seem to be discernible.’

Economic developments were however subject to ‘very high uncertainty’, with Russia’s war against Ukraine the main risk in Europe, he said.

‘The future course of the world economy is also a cause for concern, in a context of monetary policy tightening worldwide and significant geopolitical risks, compounded by the doubt regarding the impact and persistence of recent financial tensions’, he said.

Moreover, ‘the growth outlook will crucially depend on the projected disinflation actually taking place’, he said. ‘Greater persistence of high inflation would slow the recovery and, should it be seen in the euro area as a whole, would lead to a high probability of further tightening of monetary policy and, thus, of financial conditions.’

Euro area inflation should decline over the rest of this year and in the medium term come close to 2%, he said. In this respect as well, however, there was ‘much uncertainty’, also linked to Russian military aggression, he said.

Financial market tensions were a downside risk to growth and inflation, whereas a ‘continuation of the recent reversal of past supply shocks could foster confidence and support stronger growth than currently expected’, he said.

A return to price stability could be delayed if lower energy prices failed to pass through with due speed or if second-round effects emerged, he said.

The ECB would continue to set policy ‘based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the smooth functioning of the monetary policy transmission mechanism’, he said.

‘In any event, these decisions must ensure that interest rates will be brought to levels sufficiently restrictive to achieve a return of inflation to our 2% medium-term target and will be kept at those levels for as long as necessary’, he said.