Wednesday, November 29, 2023

De Cos also sees an interest rate cap, but warns against the stubbornness of the inflation genius

The Governor of the Bank of Spain, Pablo Hernández de Cos, believes that “the current level of interest rates, maintained for a sufficient period of time, would allow us to achieve our inflation target, subject to the information and forecasts available today.” This Message is taken verbatim from last week’s ECB statement, although Lagarde was later more ambiguous when she suggested that the ECB had reached its interest rate cap.

This was stated in the first entry of the new blog that the Bank of Spain launched this Wednesday. However, he explained in a didactic way: “When the spirit of inflation leaves its lamp, it becomes increasingly difficult to bring it back into it.”

Given the “significant price increase since 2021,” according to De Cos, the European Central Bank (ECB) tightened monetary policy “quickly and intensively.” In just one year, the reference interest rate (that of the deposit facility) increased from -0.5% to 4%; an unprecedented rise in the history of the euro.

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“We cannot afford persistent and high inflation,” defended Hernández de Cos, after explaining that the long-term benefits of low inflation outweigh the short-term costs (in terms of lower growth and employment) that monetary policy entails , “more than” would offset measures necessary to reduce it and justify the Eurosystem’s response.

The governor recognized that uncertainty about the development of the economy and inflation remains high, as it still depends heavily on factors that are difficult to predict, such as the war in Ukraine.

In any case, Hernández de Cos has explained that the analysis of the information currently available suggests that the current level of interest rates, if maintained for a sufficiently long period, would be generally consistent with achieving the inflation target of 2% in the medium term. “This is also the current majority opinion of analysts and financial markets,” the governor noted, before explaining the reasons why the Bank of Spain reached this conclusion.

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On the one hand, De Cos has pointed to the tightening of monetary policy, which is having a “strong” impact on financing conditions and lending. “This strength would be greater than in previous episodes. And a significant portion of the transfer is still pending,” he warned.

On the other hand, the extension of the stagnation of economic growth in the Eurozone from the first part of the year to the third quarter, including “all sectors of the economy, although employment remained strong”. In this regard, the governor recalled that ECB experts have lowered their economic growth forecasts.

In addition, the text highlights the decline in core inflation indicators in recent months, a decline “in line” with the Bank of Spain’s forecasts. In this sense, De Cos highlighted the recovery in the purchasing power of salaries and the slowdown in margins, adding that “all this gives us confidence in the decline in inflation expected by the ECB experts, which assumes 2.1% in 2025, close at our destination.”

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Finally, De Cos pointed out that although inflation risks are now balanced, there are factors that could increase them more than expected. Among other things, the governor has highlighted the possible removal of upward pressure on energy and food, as well as an increase in wages or margins. However, other factors could also accelerate the decline in inflation, such as a further weakening of demand or a stronger transmission of monetary policy.

Nation World News Desk
Nation World News Desk
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