ECB’s de Cos: If Inflation Persists, This Would Slow Growth and Probably Lead to Tighter Monetary Policy

17 May 2023

By David Barwick – FRANKFURT (Econostream) – Growth prospects hinge on whether inflation subsides, European Central Bank Governing Council member Pablo Hernández de Cos said Wednesday.

In a speech at a conference in Madrid, de Cos, who heads Banco de España, said that ‘the growth outlook will crucially depend on whether the projected disinflation materialises.’

‘A further persistence of high inflation rates would slow down the recovery and, should such persistence be observed in the euro area as a whole, would most likely lead to a further tightening of monetary policy and thus of financial conditions’, he said.

De Cos, whose remarks dealt largely with the outlook for Spanish banks, noted that existing risks had ‘recently been compounded by concerns about the impact and persistence of the recent financial stress generated by the episodes of banking turmoil in Switzerland and the United States.’

The longer interest rates remain higher, the likelier that banks will face higher funding costs and reduced credit risk quality, he said.

All in all, however, Eurozone banks and those of Spain in particular are ‘highly resilient and have high solvency and liquidity positions’, he said. ‘This has been the result of the regulatory reform agreed at the international level over the last decade, which, in the case of the EU, has been applied to all banks, irrespective of their size.’