De Cos asks the ECB for a soft rate hike due to economic uncertainty

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De Cos asks the ECB for a soft rate hike due to economic uncertainty

The Governor of the Bank of Spain, Pablo Hernández de Cos, has indicated that the European Central Bank (ECB) should not raise interest rates “abruptly” because the current economic context, affected by the war in Ukraine, is of great uncertainty. “We are facing a very uncertain scenario, including the war in Ukraine. In my opinion, the ECB should not be an additional source of uncertainty by acting abruptly, but should keep a path for our policy clearpredictable and smooth”, the governor stressed during his speech at an event organized by the investment bank Goldman Sachs.

Hernández de Cos, who as governor of the Bank of Spain sits on the Governing Council of the ECB, has also alluded to the “exogenous” factor of the current supply shock. Since this type ofand impact will have negative consequences for demand, that in itself justifies a gradual approach when raising rates so as not to excessively tighten monetary policy. The third argument of the Governor of the Bank of Spain regarding the need for a gradual approach to monetary normalization is that natural interest rates in the Eurozone are currently at a very low level. This factor is in itself a force that requires a gradual approach, according to the central banker.

De Cos recalled that the current levels of inflation are “a cause for concern” for the ECB. Although the monetary authority expects a gradual convergence towards 2% in the medium term, the war has intensified the upside risks to higher prices in the short term. Asked about the exact date when the asset purchases will end, De Cos recalled that at the last meeting the ECB suggested that the latest data supported the end of the purchases in the third quarter. However, the governor has insisted that the final decision will be made depending on the most recent data available to the ECB.

Less savings for families

The rector of the BdE has also referred to the situation of the domestic economies due to the current economic panorama, marked by the high level of inflation. Thus, De Cos has pointed out that to the extent that households perceive that the price rebound will be relatively limited, they will tend to respond to higher prices in their basket of goods and services by temporarily reducing savings to support consumption. “Therefore this should resolve, as a mitigating factor, the impact of price increases on real consumption levels,” said the governor in Goldman Sachs.

Like the euro zone, the governor points out that Spain also faces risks regarding the high levels of prices of raw materials, high uncertainty, the lower expansion of the markets, and also the persistence of interruptions in the supply chain. However, Hernández de Cos considers that there are some factors that, in principle, will support economic growth in Spain in the coming quarters and which should serve to contain the negative impact of the war in Ukraine.

The second vice president, Yolanda Díaz, talks with the union leaders.

The first of these is that it is estimated that economic activity will be boosted by the recovery of sectors that were hit hard by the Covid-19 crisis, such as transportation and hospitality or tourismwhich have recently shown a remarkable dynamism in a context in which concern about the health consequences of the pandemic has continued to decline. As an example, the governor has highlighted the most recent data on the arrival of tourists from abroad, which already reflect a notable recovery, after the strong impact of the pandemic.

The second element that the governor has mentioned is that households are expected to resort to the extraordinary savings accumulated in the pandemic, supporting consumption. Another particularly relevant element for Spain is that GDP growth in particular in 2024 will be supported by the projects associated with the ‘Next Generation EU’ programme, which will be expected to provide a strong stimulus to investment. Specifically, the Recovery, Transformation and Resilience Plan will allow Spain to add between 1.5 and 2 points of GDP in 2022 and 2023, and just under 1.5 points in 2024, according to the latest forecasts by the agency.

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