ECB’s de Cos: Policy Reaction to Worsening of Middle East Conflict Could Differ From Reaction to Russian Aggression

2 November 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Pablo Hernández de Cos on Thursday rejected speculation as to when the ECB might start loosening monetary policy.

In remarks at the Chamber of Commerce of Spain’s Santa Cruz de Tenerife, de Cos, who heads the Banco de España, said according to a text provided by his institution that a worsening of the conflict in the Middle East ‘could have a large negative impact on confidence and financial markets and, in particular, lead to a significant increase in energy commodity prices, which would constitute a further negative supply shock.’

‘The monetary policy reaction to a possible materialisation of this new supply shock could be different from the one that emerged as a result of the war in Ukraine’, he said, since despite the short-term price pressures that would result, the medium-term impact would be ‘much smaller’ in view of the ECB’s currently ‘clearly restrictive stance’ and ‘very weak’ economic activity.

‘For monetary policy to have this different reaction to the eventual materialisation of such a new negative supply shock, it would be crucial for medium-term inflation expectations to remain anchored at 2% and for second-round effects on wages and inflation to be limited’, he said.

As before, de Cos called it ‘absolutely premature to talk about interest rate cuts.’

Since the September Governing Council meeting, downside risks to growth had materialised and continued to prevail, he said.

There had been ‘similar developments as expected with regard to inflation, with headline and core inflation declining further’, he said. ‘Risks to inflation going forward remain balanced.’

Monetary policy transmission was ‘very strong’, corroborated by a stronger-than-anticipated tightening of financial conditions, he said. ‘Moreover, a significant part of the pass-through of monetary policy tightening is still outstanding’, he added.

De Cos repeated the expectation that sufficient duration would be of significant help in restoring price stability, said that data-dependence remained essential, and promised that interest rates would stay high enough for long enough.