ECB’s de Cos: Can’t Expect Interest Rates to Return to a Neutral Level in the Short Term

28 November 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Pablo Hernández de Cos on Tuesday reaffirmed that any discussion of ECB monetary policy easing in the near term was misplaced.

In remarks at a conference in Hong Kong, de Cos, who heads the Banco de España, said that ‘financial conditions today are not very different today to those that were present in September, meaning that the market is indeed expecting us to be persistent in our current level of rates.’

Therefore, he reasoned, markets shared the view of those Council members who had declared it premature to talk about rate cuts.

Financial markets were anticipating that the ECB would restore price stability, he said. ‘We might come back at some point, we should come back at some point also to a neutral level’, he said. ‘But of course, this is not to be anticipated … in the short run.’

That the current level of interest rates had to be maintained for long enough was ‘an important statement’, inasmuch as it reflected the way to look at the current situation, he said.

One aspect was the significant decline of energy and food prices, which would continue feeding through to core inflation, he said.

Demand was weakening, partly due to tighter monetary policy, which would continue to exert such an impact, he said. ‘We cannot even exclude the possibility of having negative numbers also for Q4 in the euro area’, he said.

Meanwhile, fiscal policy ‘might turn restrictive in 2024 and 2025’, according to de Cos.

‘I think it’s also important to emphasise that we’ve also gained a lot of confidence in our forecasts’, he said. ‘[I]n the last three quarters, inflation has behaved in a very similar manner as the staff was projecting initially, and indeed even for core inflation, core inflation has evolved even better, in terms of being lower than initially expected by the forecasts.’