ECB’s de Cos: Data-Dependence Important to Avoid Both Insufficient and Excessive Tightening

25 September 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Pablo Hernández de Cos on Monday reiterated that setting monetary policy in a very data-dependent way allowed policymakers to skirt the dangers of going too far and not going far enough with policy.

In a speech at the 15th International Forum of Sovereign Wealth Funds also published on the website of the Banco de España, which he heads, de Cos said that the expectation that current ECB interest rates, left where they are long enough, would allow the restoration of price stability was ‘a conditional statement.’

‘There could be further shocks, and our response to them will depend on their origin and scale and on their impact on the inflation outlook’, he said. The level and duration of policy restriction would thus be determined by incoming data, he said.

‘This approach is particularly important to avoid both insufficient tightening, which would impede the achievement of our inflation target, and excessive tightening, which would unnecessarily damage economic activity and employment’, he said.

In an environment of very high uncertainty, risks to growth were to the downside, he said. ‘In particular, growth could be slower if the effects of monetary policy are more forceful than expected, or if the world economy weakens, for instance owing to a further slowdown in China’, he said.

‘As in the case of growth, uncertainty surrounding the inflation outlook is high and we will have to continue monitoring the different sources of risk which are, in my view, now broadly balanced’, he said.

Medium-term inflation expectations were well anchored around the ECB’s target, he said. He repeated his assertion that the apparent divergence disconnect between survey-based and market-based measures of longer-term expectations was due mainly to the inflation risk premium incorporated in the latter.