De Cos believes it is “too early” to talk about interest rate cuts

The governor of the Bank of Spain, Pablo Hernández De Cos believes that, as energy prices fall, Governments must reduce their support measures to address the energy crisis.

In an interview with the German newspaper ‘Börsen Zeitung’, the governor defended that, in the event of a new episode like the one experienced in recent years of rising energy prices, governments should resort to fiscal support initiatives ” much more selective.

Additionally, the governor has urged authorities to undertake structural reforms to strengthen supply. “Fiscal policy for 2024 should be rather restrictive throughout the euro area,” he reiterated. For Hernández de Cos, this is eessential to avoid additional pressure on prices, that would otherwise require an even more forceful response from the monetary politics.

And given the “significant rise in prices since 2021, the European Central Bank (ECB) has tightened monetary policy “rapidly and intensely”, according to the governor of the Bank of Spain. In just one year, the reference interest rate (that of the deposit facility) has increased since -0.5% up to 4%; an unprecedented rise in the history of the euro.

Nevertheless, The governor has assured that, Based on the information available today and using a series of analytical tools, it can be said that the level of interest rates which has already been achieved, if maintained for a long enough period, is compatible with achieving the medium-term inflation objective (2%).

“But this is a conditional statement. We have reached this conclusion based on today’s information. Uncertainty remains high,” he clarified. Thus, she has indicated that new disturbances could occur, and the response will depend on their origin and magnitude and their impact on the inflation outlook.

Supervisors must monitor banking business models more

Asked about the latest turbulence in the banking sector, Hernández de Cos stated that there are several “lessons” about these latest episodes. First, the governor — who is also chairman of the Basel Committee on Banking Supervision — has highlighted the importance of banks’ practices to ensure financial and operational resilience.

Secondly, Hernández de Cos considers that it is essential that supervisors act promptly and effectively to quickly identify and correct deficiencies in banking practices. “Supervisors must examine a bank’s business model and its sustainability much more closely, for example, and need to have the necessary tools to act when they detect an atypical bank,” he emphasized.

Leave a Comment